Inequality

Greg Ip reports:

The wealthiest 1% of Americans earned 21.2% of all income in 2005, according to new data from the Internal Revenue Service. That is up sharply from 19% in 2004, and surpasses the previous high of 20.8% set in 2000, at the peak of the previous bull market in stocks.

The bottom 50% earned 12.8% of all income, down from 13.4% in 2004 and a bit less than their 13% share in 2000. [. . .]

The IRS data go back only to 1986, but academic research suggests the rich last had this high a share of total income in the 1920s. [. . .]

One study by University of Chicago academics Steven Kaplan and Joshua Rauh concludes that in 2004 there were more than twice as many such Wall Street professionals in the top 0.5% of all earners as there are executives from nonfinancial companies.

Mr. Rauh said "it's hard to escape the notion" that the rising share of income going to the very richest is, in part, "a Wall Street, financial industry-based story." The study shows that the highest-earning hedge-fund manager earned double in 2005 what the top earner made in 2003, and top 25 hedge-fund managers earned more in 2004 than the chief executives of all the companies in the Standard & Poor's 500-stock index, combined. It also shows profits per equity partner at the top 100 law firms doubling between 1994 and 2004, to over $1 million in 2004 dollars.

Thank God congress stepped in to save that tax break for hedge fund managers. In a little sidebar, the article notes that "The data pose a potential challenge for President Bush and the Republican presidential field" but I actually think it's striking how little Democratic Party politicians talk about inequality.

Comments

Unfortunately, that's the way it has to be. There's no way to fix the inequality problem without the "economy" coming to a screeching halt. Too many WATB investors who made bad investments who need infinite profits to bail them out.

Posted by Karmakin | October 12, 2007 9:05 AM

Congress didn't step in to save a tax break for hedge fund managers. Instead, and perhaps only temporarily, Congress opted not to rewrite the tax code in order to solve for a couple of extreme individual stories -- and don't kid yourself, this was entirely about changing outcomes rather than a level playing field.

There are a few individuals who have clearly done very well, but it is always a mistake to rewrite the tax code to target a few anecdotes. That is exactly how the AMT was created.

Posted by Publius | October 12, 2007 9:07 AM

What are the proles going to do, rise up in protest of this inequality? Storm the barricades of Congress demanding more fair tax laws? This from a Congress ready to retroactively excuse lawbreaking by telecoms on a massive scale? Go ahead, make trouble for the 1%. How are you going to organize any legitimate pushback? Should your ability to lead opposition develop your mail will be read, your phones tapped, your e-mails intercepted, your bank and medical records siezed. You think Cindy Sheehan has even a scrap of her entire existence on the planet that's unknown by Bush? For that matter is the "private" life of any person presenting the most remote possibility of trouble to Bushco already not thoroughly dissected? Publicizing this stuff doesn't bother Bush. If you get really snippy about it he can just have you shipped off to a Syrian prison for some extended conversations regarding your impertinence. Democrats and Republicans alike in Congress could give a damn if the top 1% eventually accrue 50% of all wealth. They're in that 1%. Their heirs will be happy about increasing inequality.

Posted by steve duncan | October 12, 2007 9:14 AM

It's not shocking at all, given the levels of corruption in the Democratic party, that they don't care about inequality. They don't care about winning. They don't care about democracy. They only care about lining their own pockets and protecting the special privileges of their children. I doubt that they will survive the next couple of decades as a political party. They only gain significant support when the Republican party seriously stumbles, mostly because they refuse to engage the public on the issues that matter that they should have in common. A left wing party simply can not survive without class warfare, and as such the Democratic party will not survive if they continue on this course. I doubt their majorities will last through 2012, and I doubt they will retain the presidency either.

Karma, that's mostly bullshit. The economy would not 'come to a screeching halt' and many of these investors would go bankrupt if they attempted any significant divestment from their current holdings. No matter how much they whine, they never carry out their threats. They never massively lay off people when you raise the minimum wage. They never stop investing when you raise taxes. Everything you learned in Economics 101-201 is ideaological bullshit that never really happens in the real world. Business's hire people because they have to, so they can't afford to lay people off and maintain their business. Investors invest because they don't have a whole lot of other options. They bitch and moan, but in the end they adjust to the new circumstances because they don't really have a choice.

Posted by Soullite | October 12, 2007 9:20 AM

When will liberals stop throwing around these meaningless statistics about annual income inequality and start to address the evidence of actual consumption inequality?

Posted by Chris | October 12, 2007 9:26 AM

Soullite--although it's a little ambiguous, I'm pretty sure Karmakin's comment was intended ironically. (I only point this out because I came within one "Return" keystroke of responding with an enraged screed greatly similar to your second paragraph.)

Posted by James Gary | October 12, 2007 9:33 AM

I actually think it's striking how little Democratic Party politicians talk about inequality.

Why?
The Democratic Party has been conditioned since the late 1970s to fear ever speaking an egalitarian message. I mean, that's communism, don't you know. Why do you thing the WSJ editorial board was formed, why the AEI exists, why FOX News leans all one way? It's about controlling perceived reality and in America's political universe equality is evil. Well except civil rights, racism is so gauche don't you know, but it's not like we have to spend any money to improve opportunities now.
For as long as I can remember the USA has had a culture of inequality.

Posted by Northern Observer | October 12, 2007 9:47 AM

When will liberals stop throwing around these meaningless statistics about annual income inequality and start to address the evidence of actual consumption inequality?

Posted by Chris | October 12, 2007 9:26 AM

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
I think Chris is onto something. For far too long the middle class and the poor have reserved the lion's share of their income for trifles such as food, utilities, clothing, medical care and housing. When will they help fuel the economy to the same degree their fellow citizens, the affluent one-percenters do? These uptown wannabes deliberately cripple the engines of progress and prosperity by foregoing the purchase of yachts, planes, luxury cars, jewelry and mining/oil extraction investment opportunities. They hinder the travel and tourist industry by not traveling extensively to Europe, Asia and other exotic lands. Yes, consumption inequality is the root of our problems. The lower 99% of earners must somehow be seperated from more of their discretionary income lest the republic perish.

Posted by steve duncan | October 12, 2007 9:50 AM

Let's remember that the President who presided over the greatest postwar increase in income inequality was... Clinton.

Under Bush, the percentage earned by the top 1% has increased less than 0.1% per year. Under Clinton, the rise was much greater.

Posted by Al | October 12, 2007 10:00 AM

doesn't this also mean there should be a huge market for hedge fund manager willing to work for only ridiculous instead of obscene wages? I know essentially zero about finance, but if everyone is saying that index funds are a better bet than managed funds, why are so many managers still employed? (ok, hedge fund != mutual fund, but still) I guess once you factor in the lawyers, the whole argument tanks...

Posted by bs23 | October 12, 2007 10:07 AM

This does makes one wonder how high this wealthiest 1% percent share would have to get before "the people" say "aren't things a wee bit out of kilter?"

My guess it would have to top 50%. This is America and one of the strongest American myths is everyone should have a chance to be rich.

I guess the average Joe or Josephine are sitting at home thinking that perhaps, yes, they too will someday be hedge-fund managers so let's not fiddle with anything that might blow our chances.

A massive Depression might wake them up, however.

Posted by Lynn | October 12, 2007 10:13 AM

My coment wasn't really meant in an ironic manner. It was meant in a too-realistic too-pessimistic manner.

As long as the media/political elite judge economic growth through the eyes of Wall Street, don't expect any change ever.

The reality is that an overwhelming number of "investment oppurtunities" are way out of whack. The cost to invest, compared to the potential non-capital gains rewards are basically a pittance. It's not even about corporate profit. It's about the illusion of infinite growth.

The reality is that in order to maintain that illusion to get more and more money flowing into the system (which is the only way that the system makes any profit worth mentioning), profits need to always be rising. If not, the stock tanks. If profits are stable, the stock tanks.

Unfortunately, because of the huge ponzi scheme, trying to pull it apart at this point, as it'll hurt a lot of people, not just the rich but upper middle class and even lower classes who might have some sort of retirement fund/pension plan heavily involved in it, it'll be a mess. It'll probably implode anyway when the pensions/retirement funds start pulling out, but politically it's a 3rd rail I think.

Best thing to do at this point is mitigate the damage.

Posted by Karmakin | October 12, 2007 10:37 AM

"but it is always a mistake to rewrite the tax code to target a few anecdotes."

That's a cute diversion. The interpretation of management fees as a gain on capital rather than income is something more than an anecdote, it's a perversion of the tax code. Those guys can clearly afford to be taxed at the same rates as ordinary workers, their fees are not capital gains in any meaningful sense of the word, and Charles Schumer ought to suck it up and support a legislative remedy making that clear.

Posted by David in NY | October 12, 2007 10:40 AM

Karma, I don't buy your threats. I don't. It seems like a self serving argument not to shake up the status quo. It's an argument people like you make out of fear. Fear that the future won't work out as well for you as the present. Fear of the mob if you throw them a bone. It's bullshit, these are the same arguments used across history by people who mean to stand in the way of progress. You essentially argue favor of an a system in perpetual decay towards serfdom and slavery out of fear, uncertainty and doubt as to the alternatives. At some point you have to reap what you sow, and take responsibility for your actions. We have deep problems in this society, and it's wise to actually deal with them and take our lumps now. You just want to kick this shit so far down the road you'll never actually have to deal with it because you'll already be dead.

Posted by Soullite | October 12, 2007 3:21 PM

Mainstream Dems were smart to drop plans for permanent "solution" to the temporary "problem" of hedge fund managers raking it in. Low interest rates and low-cost leverage enabled a lot of hedge funds to spring up claiming to offer institutions (including public employee pension funds) high returns uncorrelated with the stock market. This pitch was especially attractive in the wake of the bear market-bucking performance of prominent endowments such as those of Harvard and Yale, that did well with their hedge funds and other alternate investments when the stock market was tanking.

So lots of guys jumped to start their own hedge funds to ride the wave of money flowing in. Then, with the credit crunch, all the highly-leveraged funds were forced to sell at the same time, and many lost appalling amounts of money in August. So the boom is being followed by an inevitable consolidation. The real geniuses like Stephen Caplan of SAC Capital, the folks at Citadel, Fortress, etc. will continue to make lots of money, but there will be fewer hedge funds, and hedge fund managers' share of the top incomes will decrease.

Posted by Fred | October 12, 2007 3:40 PM

Soullite,

Serfdom? Slavery? Are you serious. The only people who come close to that description are poor immigrants (legal and otherwise) who voluntarily come here and have a higher standard of living relative to where they came from (but pretty poor from our viewpoint). Are you poor as well or just a crusader? Somehow you've found a computer to let you vent, so you either a) own a computer (not cheap), b) work with a computer (you probably earn at least the median income), or c) you took the bus to the public library to log on (in which case you probably are poor--or cheap). The US is still the country of choice for those who want to improve their lot through education and work. The EU is where people go to get on the dole and riot about not having a job.

Karma,

Who taught you about the stock market? Paul Krugman or some other socialist? What is your alternative to publicly owned companies? All private companies like UPS or Koch Energy where the public has no chance to look at the books or vote for directors? Enron was a mess, but it's public nature allowed the feds to find out what was going on and imprison the bad guys. Same with WorldCom and the rest. I suppose your ultimate goal is state ownership of all businesses. That would be awesome. It works so well for Cuba and continues to allow the Soviet Union to thrive.

Posted by Carlos | October 12, 2007 3:50 PM

There are, as they say in Spanish, "cases and cases." The hedge-fund thing doesn't bother me, since that is some super-rich taking from others. I'd support legislation to keep public investment funds out of it, which the riskiness of hedge funds in itself should justify. The income of executives of privately held corporations doesn't bother me either, because they're privately held and that term has to mean something. I'm really only concerned, on the super-rich front, with the incomes of executives of publicly held companies. That's where the government should have some role in making it easier for shareholders to exercise effective control, as befits their nominal condition as part owners of the company instead of passive rentiers.

Inequality as an overall phenomenon might be a brake on the healthy development of the economy, but I'm not concerned from a humanistic perspective with percentage shares--top 1% holds x while bottom 20% holds Y. I'm concerned with the absolute condition of the bottom 20%, and the 20 above them and maybe even the next 20, and short of a demonstration that the wealth of the top 1% directly impacts the condition of the bottom groups (as opposed, say, to the next 1% down), color me flummoxed to see such wealth in the hands of such arbitrarily "chosen" people, but I can't say it moves me in a policy sense.

Posted by Rich | October 12, 2007 4:36 PM

On a somewhat unrelated note, I'll point out that at least partners at law firms pay ordinary income rates on every dollar of their law firm income.

Posted by DJ Ninja | October 12, 2007 5:29 PM

You find it "striking how little Democratic Party politicians talk about inequality" and I find it odd that you don't find it fitting in such a post to mention one prominent Democratic Party politician who has made just that the center piece of his current presidential campaign. You may know of the guy. Ran for President four years ago, then ended up on the bottom half of the Democratic ticket.

Posted by what was that name again | October 12, 2007 6:53 PM

That's Stephen Cohen of SAC Capital. Surprised none of you hedge fund aficionados corrected me yet.

Posted by Fred | October 12, 2007 8:06 PM