A Tale of Two Podcasts on the 1%: Do Andrew Kliman and Russ Roberts agree?
In a social media group I more or less run, I have been debating Andrew Kliman‘s claim that the income disparity is misleading people to adopt under-consumptionist arguments. In this debate, Doug Henwood’s recent post on the CBO has been brought up:
The Congressional Budget Office is out with some new stats on Trends in the Distribution of Income over the last three decades. Between 1979 and 2007, here’s how various slices of the population did in real (inflation-adjusted) income growth after federal taxes:
top 1%: +275%
next 19%: +65%
middle 60%: +40%
bottom 20%: +18%
Yet, I was listening to the EconTalk, which I do in my effort to understand various economic problems and paradigms even from a capitalistic perspective. Furthermore, Russ Roberts has a right-libertarian minarchist, but he’s an honest one for all his ideological limitations. Russ was talking to Steven Kaplan about the 1% and income inequality. It appears that things are more complicated:
So while there is some truth to Doug Henwood’s assertion:
As of 2005, the share going to the top 20% surpassed the share going to the bottom 80%—though as the breakdown shows, most of this shift came from the very top. In 1979, the top 1% claimed about the same share as the bottom 20%; as of 2007, the top 1% hogged as much as the bottom 40%.
This is often been used to justify Henwood, Richard Wolff, and many of the other popular leftists at Pascifica radio an under-consumptionist view which could be fixed by a sort of progressive market socialism. But looking at the information you get from people like Steven Kaplan and Russ Roberts on the 1% presents a much more complicated picture:
But we’re going to stick with the standard view, which is that if we look at a snapshot in time today versus a snapshot in time a while back, whether it’s 15 or 20 or 30 years ago, the people who are in the top 1% or the top tenth of 1% have higher shares and typically make more money–and sometimes a lot more money–than the people who were in the top 1% in the past. So, how much has changed? How much richer are those folks at the top compared to those folks at the top a while back? The comparison I think most people focus on is if you go back to, say, 1980 or the late 1970s, the top 1% earned roughly 10% of the adjusted gross income in the United States. So the way this is usually framed is in terms of income shares and it’s pre-tax income, it’s adjusted gross income, so no taxes. But in the late 1970s, early 1980s, it was about a little under 10% of adjusted gross income and it peaked in 2007 at exactly 23.5%. So, if you look at pre-tax income of the top 1% it went from under 10% to 23.5%. Now, what’s interesting about that is the 23.5% in 2007 was the second highest on record. The highest and highest still is 1928, where it was 23.9%. Ah, the good old days. Now, it’s not comparable because taxes were a lot lower back in 1928 than they are today, so after tax you might get a different answer. But pre-tax it was very high. In the last two years, it’s way down. Recessions are bad for the rich. If you care about inequality per se, recessions are great. That appears to be true, so in 2009 the top 1% I calculated at 17.6%. I’ve seen other calculations a tad under 17%, but it’s basically gone from 23.5 to 17. What’s interesting about 17 is that inequality in 2009 is actually lower than it was during any year of Bill Clinton’s second term.
Nonetheless, major U.S. banks have struggled this year on the whole, with Goldman Sachs reporting its second loss ever as a public company and BofA’s stock price plunging over the last ten months. The financial industry has already announced a slew of mass layoffs, and the New York comptroller recently estimated that Wall Street could lose 10,000 more jobs by the end of 2012.
Still, corporations have boomed during Obama’s presidency, even as unemployment has remained high. Corporate profits hit an all-time high of $1.93 trillion in the second quarter of 2011, according to the Bureau of Economic Analysis, up from an earlier all-time high in the fourth quarter of 2010. Corporate profits accounted for 88 percent of all economic growth during the first 18 months after the end of the recession, compared to just 53 percent of economic growth after the 2001 recession under Bush.
Now there is a some interesting points as Wall Street firms are a specific type of capital manifestation:
Okay, so what did you find? What are some of the patterns that are interesting and what did you learn from them? Among the patterns that were most interesting were that the CEOs weren’t that unusual. This is the CEOs of non-Wall Stree, non-financial firms. Public companies, yes. The CEOs were just not unusual. Meaning? That their pay went up but it more or less over time went up like the rest of the top 1% or top .1%. So, this a view that corporate governance is broken, that boards are corrupt seems hard to understand when the CEOs are going up just like all the others. For example, top corporate lawyers saw their pay go up from say 1980 to date, partners at top law firms have increased their pay by about the same percentage as CEOs. It certainly is inconsistent with the theory that CEO pay at Main Street, publicly-traded companies is the source of the 1% growing. It doesn’t refute the possibility that corporate governance is broken. Well, I agree–they are a very small fraction of the total–somewhere between 2-6% of the very top would come from public company executives. But the fact that their pay is not behaving any differently than the pay of bankers, or lawyers–they are all being driven by similar forces. Why would it be that this one group, corporate boards and CEOs are corrupt and are overpaying themselves–why would they be being paid roughly the same as people who are paid via arm’s-length dealings? You’d think they could do even better than that. But of course a particular kind of cynic says: Well, yeah, all these people at the top have figured out–what Paul Krugman in his recent blog post called “The Oligarchy”–they’ve all figured out how to exploit the political system to enhance their own nests. It’s possible. The other thing that strikes me there is hard to reconcile with that–and this is more anecdotal than data because the data are hard to find–but you do see similar patterns all over the world. I certainly see it with my students. Whether it’s London or Asia now, the pay at the top for all these places for top talent do pay large numbers. We’ll come back to oligarchical explanation. Let’s stick with your finding. So, you found that for the CEOs, they seemed to be following the same pattern; another way to say it might be that it suggests there is a market for very talented people, and they are part of that. They are not different, not manipulating the market. That is basically the conclusion we came to. I’m sympathetic to that conclusion so I want to push back against it in a little bit. What else did you find in the data? Some remarkable things about hedge funds. That was amazing. Talk about that a little bit. This is one that was a lot of fun, when you talk about it. If you look at what the top hedge fund managers earn, in 2009, which was remember not a great year for the very top, the estimates that the top 25 hedge fund investors earned over $25 billion. They average $1 billion apiece. A fair amount of money. When you add up what all S&P500 CEOs earned, the S&P500 CEO in 2009 earned about $8 million each; but $8 million times 500 is $4 billion; and the 25 top hedge fund investors earned $25 billion. So that’s five or six times as much. Mind-boggling number. Some might say that’s more than enough. Whether it’s more than enough is I guess a value judgment. What we were more interested in doing than thinking about the fairness issues, which are very hard–those can be argued in many ways–we were more interested in understanding what could explain this. And what could explain what really is the pervasiveness of this increase at the top. So, the CEOs went up, but not any more than these other groups; the bankers went up, the hedge fund managers obviously went up a lot; the lawyers went up. One of the more amusing things about disclosure is that, Eric Holder and other people going into the government–Attorney General of the United States–have to disclose what they earned. You know what he earned the year before he was Attorney General when he was a law partner? $3.3 million. Good figure. He was a .1% kind of guy; in fact, that probably put him in the .05%. Might make him a little more sensitive of the problem. Just trying my best. What explains hedge funds–the outliers might not be the right guys–certainly at the extreme. John Paulson had a couple of very good year where his 20% of the profits at his hedge fund were well into the billions. Technology, globalization, and incentivization. What are those three things? First, technology has changed tremendously over the last 30 years, particularly information technology, which allows you to scale your talent. Where do you see that? In the financial markets, with computers and computerized trading–you can push billions of dollars around quickly, and you couldn’t do that so easily 30 years ago or 20 years ago. So, technology allows talent to scale; you see that in entertainment–with cable, which allows you do segment your audience and actually now gets more product to more people–that allows talent to scale. For lawyers, you are applying your talent to bigger deals. Technology has been very important, and it’s been information technology which has really helped people scale. The second piece is globalization; and again, it allows you, if you are an investor you can invest not only in the United States but globally; if you are a corporation you can invest globally–it’s allowed companies to outsource and that also allows talent to scale.
While I do not agree at all with Robert’s and Kaplan’s analysis, it points at a central point ignored by under-consumptionist who essentially look at capital from a America-centric or Euro-centric view, investor growth in globalization has expanded markets making it look like the profits are increasing, but they are not increasing as part of an individual nation’s GDP. Goran Therborn writes about this in From Marxism to Post-Marxism:
“Despite the many claims to the contrary–echoed on both Left and Right–the welfare state still stands tall wherever it was constructed. Whether measured by public expenditure or by revenue, the public sector in the richest coutnries of the world stands at, or has plateaued at, peak historical levels. For the OECD countries of Western Europe, North America, Japan and Oceania the national average of the total outlays (unweighted by population, but exclusive of Iceland and Luxembourg) in 1960 was 24.7 percent of GDP. By 2005 it stood at 44 percent. “
The welfare state has not gone away nor have corporate earnings outpaced GDP growth as a percentage of the economy. Now when you contrast that to the above, you get a much stranger picture. Why are rich getting richer is corporate incomes are skyrocketing if we don’t buy what Kaplan and Robert’s say is merely “an economic pay adjust commensurate with the increased scale of the economy.” This dramatically makes the under-consumptionism implied highly untenable. Depressions and recessions have are not based purely on consumer cycles.
This brings me to Andrew Kliman and why I am increasingly sure he is right. Douglas Lain interviewed Andrew Kliman , in which Kliman makes his case quite convincingly about the specific numbers and his numbers are MUCH more in line with Russ Roberts. Indeed, he says explicitly that merely distributing the wealth downwards does not undo the problem. Kliman does not say this but I see it: this will lead to a return to Keynesian stagflation. While there is much debate between the reconciliation of Marx and Keynes, this has been the de facto argument by Social Democrats that Marxist goals can be evoluted by Keynesian means, this redistribution of wealth to lower class does not undo this: it just stales it.
So looking at what Kliman has to say will help here:
A point Kliman makes in his interview with Douglas Lain is vital: Many leftists do not want to look at this because it makes some of the points right-libertarians and conservatives say about capitalism and wealth redistribution are actually true. It’s not that they are all deluded: Instead the Social Democratic impulse does not wish to transcend capitalism but to save it from itself through something like Keynesian mixed economic market socialism. However, while the Welfare state still exists and even grows, it cannot grow forever without causing severe capital flight. You can’t reform global capitalism to make it nicer.