Tuesday, September 09, 2008

Extreme inequality

In a recent post about inequality, Matt Zeitlin points out the critical difference between "90-10" inequality, where the share of income going to earners around the 90th percentile shoots up, and inequality within the top decile, where income is further skewed toward the richest of the rich. While the two are often wrapped together into a more generic discussion about "inequality," they are arguably separate phenomena with very different causes and policy implications. Matt explains further, referencing a piece by Robert Gordon and Ian Dew-Becker:
One type of inequality is “90-10″ inequality. This is the standard, skills based technological change explanation of inequality. Basically, managers got more money and benefited the most from productivity gains, which were unchained from median wages in the late 1970s. There’s also the unbounded increase in the college wage premium, which is no longer cyclical. This is the 90th percentile, and above, running away from everyone else - or, everyone else staying behind, while the 90th percentile’s income inequality shoots up.

But that’s not the entire inequality story, the other is inequality within the top decile. This is the inequality that liberals and progressives find so objectionable. This inequality that isn’t driven so much by technological change, lagging minimum wage, or decreased unionization, but instead by the “superstar effect” (JK Rowling can sell more books than any other author in history) or the institutional failures behind skyrocketing CEO pay. And the only way to address that inequality is massively increasing marginal income rates.

In an Obama administration, we’ll probably see a bunch of policies that address 90-10 inequality, along with modest tax increases on the rich. But I don’t think we’ll see a decrease in the type of inequality that people really don’t like. Even if median wages go up, they’ll still be far outpaced by wages at the top, which have gone up by 121 percent at the 99th percentile, 236 percent at the 99.9th percentile and 617 percent at the 99.99th percentile. We’ll be living in interesting times, to say the least.
I completely agree. I'm afraid, frankly, that much of the political rhetoric about extreme inequality at the top has little policy substance. Unless you have some way to change corporate governance and bring down CEO pay -- easier said than done, especially when there's no consensus that CEO pay is truly inflated relative to the fundamentals -- your only avenue for redistributing the incomes of the super-rich is taxation. Sometimes this is a simple matter, as it is with closing the loophole used by hedge fund managers, but in general it's much more complicated. Past a certain point, higher marginal tax rates on the rich become excruciatingly inefficient as a revenue source, and by discouraging work and entrepreneurship they begin to do more harm than good.

1 comment:

Peter H said...

You might find this piece informative: