We Are The 1%

Two different perspectives on income inequality – from the other side. First Greg Mankiw:

The Rich Get Poorer
Greg Mankiw

Here is a fact that you might not have heard from the Occupy Wall Street crowd: The incomes at the top of the income distribution have fallen substantially over the past few years.

According to the most recent IRS data, between 2007 and 2009, the 99th percentile income (AGI, not inflation-adjusted) fell from $410,096 to $343,927. The 99.9th percentile income fell from $2,155,365 to $1,432,890. During the same period, median income fell from $32,879 to $32,396.

These recent numbers illustrate the broader phenomenon, discussed in this paper, that high-income households have riskier-than-average incomes.

…and from Raghuram Rajan:

The Undeserving One Percent?
Raghuram Rajan

It is amazing how the “one percent” epithet, a reference to the top 1% of earners, has caught on in the United States and elsewhere in the developed world. In the United States, this 1% includes all those with a 2006 household income of at least $386,000. In the popular narrative, the 1% is thickly populated with unscrupulous corporate titans, greedy bankers, and insider-trading hedge-fund managers. Reading some progressive economists, it might seem that the answer to all of America’s current problems is to tax the 1% and redistribute to everyone else.

Of course, underlying this narrative is the view that this income is ill-gotten, made possible by Bush-era tax cuts, the broken corporate governance system, and the conflict-of-interest-ridden financial system. The 1% are not people who have earned money the hard way by making real things, so there is no harm in taking it away from them.

Clearly, this caricature is based on some truth. For instance, corporations, especially in the financial sector, reward too many executives richly despite mediocre performance. But apart from tarring too many with the same brush, there is something deeply troubling about this narrative’s reductionism.

It ignores, for example, the fact that many of the truly rich are entrepreneurs. It likewise ignores the fact that many of the wealthy are sports stars and entertainers, and that their ranks include professionals such as doctors, lawyers, consultants, and even some of our favorite progressive economists. In other words, the rich today are more likely to be working than idle.

But what might be the most important overlooked fact is that the rise in income inequality is not just at the very top, though it is most pronounced there. Academic studies suggest that the top tenth percentile of income distribution in the US, and elsewhere, is also moving farther away from the median earner. This is an inconvenient fact for the progressive economist. “We are the 90%,” sounds less dramatic than “we are the 99%.” And, for some of the protesters, it may not even be true…

I think Prof Mankiw has a solid point…and I think Prof Rajan is (mostly) blowing smoke. I’ll grant his point that the 1% aren’t necessarily undeserving of their wealth but, the point of reducing income inequality isn’t necessarily about public appropriation and redistribution of ill-gotten gains, it’s about fairness.

[BTW, in Malaysia if your household is earning more than RM5000 a month, you’re in the top 20%. Feel rich? Neither do I].

Irrespective of how they got their wealth, the structure of the world as it is today is such that that wealth provides the rich with a leg up in growing that wealth even further – money begets money. I’m not advocating a truly flat society here, as there should always be a reward for effort and talent. In a meritocracy, income and wealth inequality is a direct consequence.

But by the same token, those with talent and the desire to work but without financial resources are handicapped by such a reward system. In economic terminology, initial endowments matter. Econ 101 would say that a free market system provides the best and most efficient allocation of resources (and by extension, the rewards) – but that takes as an unspoken assumption that people start off with an equal distribution of resources. Change the initial resource allocation, and you’ll come up with something quite different.

Is it too much of a stretch to think that those of us who’ve “made it” contribute something back to society and the system that allowed them to “make it”? Bill Gates and Warren Buffet certainly don’t think so.