Market Forces

Ian Dew-Becker and Robert J. Gordon take an interesting look at the growth in inequality in the United States:

Within the top 10 percent, SBTC has certainly still been an issue, and there is a role of SBTC in contributing to pay premia of entertainment and sports superstars. In a variety of settings, technology has allowed superstars to distribute their talent to a wider variety of consumers. This has driven their incomes up exponentially. Their earnings are an outcome of market forces, and the only policy measure available to achieve greater after-tax equality is an increase in tax rates at the top balanced by a decrease at the bottom. However, for top corporate executives, there is strong evidence that incomes have been driven by non-market forces. This is where policy can have the most positive impact on inequality; increased disclosure and improved corporate governance laws can not only raise firm value but help distribute economic gains more evenly across society.

This treatment of the "superstar" issue seems wrongheaded to me. The point of understanding the causes of the growth in inequality isn't to assemble a prosecutor's brief against very rich people and then dole out appropriate punishment. If that was the point then, yes, we'd have to deem superstar athletes and entertainers (and presumably the agents, managers, and lawyers who take home a percentage of their gross) who've taken advantage of the globalization of the entertainment space to become richer than ever "innocent." But the point of understanding the situation is to enable us to think clearly about forward-looking policy options.

It seems to be the case at first blush, for example, that policies which tax the incomes of the very rich in order to pay for widely used public services are very appealing policies. But, an opponent may counter, such policies will actually crush economic growth and make us all worse off! To the extent that the super-rich class is composed of superstar entertainers and their hangers-on this counterargument seems to me to be weaker -- ever-growing after-tax income for movie stars is not integral to the long-term future of the American economy in the way that potential uses of the money to provide for adequate infrastructure and a healthy, well-educated population are.

Comments

"But, an opponent may counter, such policies will actually crush economic growth and make us all worse off!"

There's essentially no evidence that somewhat higher taxes (as long as they remain reasonable) really reduce economic growth. Nevada, which has no personal income tax, is adjacent to California, which has an state income tax running up to 9%. And there's little indication that Nevada's lower tax status has reduced California's economic growth.

Posted by burritoboy | June 27, 2008 4:35 PM

I'm a rational liberal, but the burritoboy argument that Nevada had not reduced growth in California has no basis in fact.

Explain to me how the people moving from California to Nevada had no negative impact on growth in California.

Posted by spencer | June 27, 2008 6:03 PM

A forward looking argument would be that it is detrimental to the health of democracy in America if a small economic elite is allowed to accumulate too great a portion of the pie, relative to the rest of the citizens.

In that we've seen that a rising tide doesn't necessarily raise all boats, extreme wealth concentrations are demonstratively detrimental to the literal and economic health of the bottom 95% of wage earners.

Posted by cmholm | June 27, 2008 7:22 PM

Much of the unpaid gains in productivity have gone to more pay, but this has often gone to cover the higher costs of company insurance plans.

It seems to be the case at first blush, for example, that policies which tax the incomes of the very rich in order to pay for widely used public services are very appealing policies. But, an opponent may counter, such policies will actually crush economic growth and make us all worse off!

The experience in Europe has been that all the redistribution efforts (and earmarking the tax takings to public services merely obfuscates the fact that you're redistributing who pays for what) have led to significant redistribution of income amongst the poor and the middle class. The top earners still have enough lobbying leverage to get substantial loopholes, or they skirt the law by hiding their money in tax havens. Some simply emigrate to get higher net incomes after taxes.

When taxes on returns from investments become too onerous, this investment also departs, making the whole economy perform worse than its potential.

Posted by MarkG | June 27, 2008 7:22 PM

Much of the unpaid gains in productivity have gone to more pay, but this has often gone to cover the higher costs of company insurance plans.

A recent Consumer Reports took a look at who was inflating the cost of health care. They suggested that it's the fragmented nature of our system, and the drivers were the hospitals, the insurers, and the pharmaceutical companies, I believe in that order. The rest were small potatoes.

If so, that suggests that rather than just taxing the living bejesus out of the rich, instead we reorganize the cost centers, and pay for that by merely taxing the smile off the faces of the rich... which wouldn't take much.

Posted by cmholm | June 27, 2008 7:39 PM

What do you think of McCain's plan to require shareholder approval of CEO salaries and severance packages?

Posted by S.P. Gass | June 27, 2008 7:44 PM

Matt,

You need to read through your block quotes and put in full names for acronyms in brackets. I got to "SBTC," looked around for some explanation of what an SBTC is, couldn't find any, and gave up.

Judging by how few comments this item received, I'm sure others were also stumped.

Posted by Steve Sailer | June 27, 2008 8:12 PM

I too am opposed to the harmful economic impact of the Seattle Bicycle Touring Club.

(Or maybe it was "Skill-Biased Technical Change".)

Posted by El Cid | June 27, 2008 8:47 PM

We might want to consider, realistically, the implications of mega-pay for CEOs and Hedge Fund Managers. Implications like the extremely short-term thinking that comes with knowing that you will have a job that pays tens of millions a year, or more, for a very short time.

The ruthless conduct that gets someone one of those jobs, and the equally ruthless conduct that allows the incumbent to milk the job for all it's worth, are not good for the economy. Those kinds of extreme "incentives" encourage the wrong sort, to strive in destructive ways.

If a 70+% tax bracket reduces the "incentive" to grab for the brass ring in the corner office, reducing the fierce turnover at the top, and encouraging more achievement-oriented types to seek to lead, then it would be all to the good.

Posted by Bruce Wilder | June 28, 2008 1:08 AM

Silly!

The income distribution charts do not track people over time and thus provide the illusion of wage stagnation (they imply that the same people each year are still making $30,000 when it now people who were making $27,500) and income inequality in the following way. Of course someone in the mailroom makes $7/hour and the CEO makes $10M+. But the CEO was the guy in the mailroom. If you follow both careers of both mailroom to CEO people seperated by a couple of generations, their incomes would be the same over time whereas currently the CEO makes 1000x+ more.[Of course this is an absurd simplification.] But statistics that do track people's incomes over time [the IRS just completed one] shows people's real after tax incomes rise on average 10%/year during their lives.

The USA has never been a better place for reasonably dedicated (particularly students), diligent and sober poor and middle income people. The problem is Democrats keep providing incentives and infrastrucure for so many people to be disinterested (students), debauched, drunken, and drugged.

TOH

Posted by The Objective Historian | June 28, 2008 1:21 AM

Re: If a 70+% tax bracket reduces the "incentive" to grab for the brass ring in the corner office,

We are not going to return to a 70$% tax bracket. Realistically even 40% on the top earners would be a battle royal. And even when we had a 70% tax bracket, almost no one paid anywhere near that amount given the numerous loopholes which the rich were able to "persuade" Congress into enacting. In fact, the reason we have the AMT is because more than a few mega-wealthy individuals back in the 60s were paying no taxes at all.

Re: But the CEO was the guy in the mailroom.

Bullshit. While most CEOs are not "to the manor born" they are to the McMansion-born, meaning that they tend to come from the decidedly upper middle class to start with and they are given a very large head start by parents who at least are comfortablly well off. For one thing they can get into the very top colleges (Harvard etc.). Outside of entertainment figures (with whom I include athletes) there are almost no "rags to riches" stories in the modern US. Social mobility certainly exists, but for most of us the best we can hope for is going up the ladder a rung or two from where our parents were.

Posted by JonF | June 28, 2008 9:56 AM

As a response to the block quote, this posts seems wrongheaded.

The block quote addresses one aspect of the problem: are these inequalities market driven? Finding that some of them are not, these can be fixed by appropriate not-tax-oriented policy choices, as they argue is the case with CEO pay.

Then you address the other side of the equation: to the extent that these inequalities are market driven, are they market incentives that are really valuable to our economy? And for movie stars the answer is clearly no.

But if CEO pay was a truly market driven phenomenon, you would have to be hesitant to pursue policy discouraging it.

Posted by mpowell | June 28, 2008 10:18 AM

Conservatives love to focus on a few stars and, at the other extreme, those "welfare queens." It helps disguise policies that support the wealthy. It helps real suffering off the table. It helps align the middle-class with the rich, as with those tax breaks that "average" bounties for all, against the poor. And it sneaks in the assumption that conservatives really care about merit and oppose limits to freedom that impose bias. It makes the wealthy the oppressed, against the supposed true elites.

That's why Brooks makes class a matter of consumer culture, which he can then paint anecdotally without need for accuracy. It's why Rand's vision centers on imagined creative titans. It's why the most serious philosophical defense of a conservative position, by Nozick, is called "the Walt Chamberlin problem."

Posted by John Haber | June 28, 2008 11:15 AM

"But statistics that do track people's incomes over time [the IRS just completed one] shows people's real after tax incomes rise on average 10%/year during their lives."

Okay, I call bullshit. That would mean that a person with a forty-two-year work history would see their income increase (assuming this is a compound rate (what else could it be?)) a 64-fold increase in their income over that work history. So the average guy who was making 5 grand a year starting out in the mailroom or whererever in 1967, is now making, on average, $320,000 a year.

Better class of troll, please.

Posted by Jose Padilla | June 28, 2008 12:40 PM