Arnold Kling  

Thoughts on the Super-Rich

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Brad DeLong writes


If it is luck or talent, the 60% of me that is a social democrat thinks that this is grossly unfair, and that we should think very seriously about powerful public policies that will level the distribution of income.

Then the 20% of me that is a libertarian breaks its chains, comes running out of the cave, hits the social democrat on the head with a brick, grabs the microphone and rants: "Do you really trust the American government to manage a major downward redistribution of wealth without doing immense harm? And who would you rather have deciding how Bill Gates's $100 billion and Warren Buffett's $40 billion will be spent--Karl Rove or Bill Gates and the staff of the Bill and Melinda Gates Foundation?"


It's an interesting meditation on income inequality. Read the whole thing--I just chose the excerpt because it is funny.

My question is this: is the growth in the top 1 percent of incomes due to the fact that the top 1 percent are adding more to the economic pie than ever?

If the top 1 percent is adding more to the pie than ever, then it seems to me that those of us in the bottom 99 percent have no reason to complain. On the other hand, if the share of income going to the top 1 percent is rising but their contribution to economic growth is not, then some populist resentment is understandable.

I'll admit to holding some prejudices. I tend to think that entrepreneurs create wealth. I don't think of them as coming up with ways to steal more of the pie for themselves. I think of them as coming up with ways to make the pie bigger.

I am not so sure about investment bankers or CEO's of Fortune 500 companies. I think of them as pie-grabbing rather than pie-expanding.

Again, those are pure prejudices. No empirical data. But my attitude about the growth in incomes of the top 1 percent would probably depend on whether that reflects more entrepreneurial rewards vs. higher executive compensation or investment-banker winnings.

With all that said, my sympathies are with Brad's cave-dwelling libertarian.

Thanks to Alex Tabarrok for the pointer to DeLong's post.


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CATEGORIES: Income Distribution



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The author at Club for Growth in a related article titled Tuesday's Daily News writes:
    ECONOMIC NEWS Where's the War on Pork? - Mary Katharine Ham, DC Examiner Thanks for the Tax Increase - Sam Batkins, NTU Meet George Allen - Dave Holman, American Spectator Thoughts on the Super-Rich - Arnold Kling, EconLib.org Raising Wages on the Back... [Tracked on July 18, 2006 9:37 AM]
The author at Half Sigma in a related article titled The salary taboo writes:
    In America, it's taboo to talk about your salary. It's a pretty strange taboo because most of the other taboos have something to do with sex. The salary taboo seems even stronger than sex taboos. Today, you turn on HBO [Tracked on July 18, 2006 3:45 PM]
COMMENTS (9 to date)
liberty writes:

1. To Brad's "Do you really trust the American government to manage a major downward redistribution of wealth without doing immense harm"

Whether government does a "superb job" or a "poor job" is not really the issue in the case of redistribution. No matter how you redistribute - through welfare programs, through cost-free tax rates and refunds or through subsidies, it does not matter: you will still be curbing future growth. If I can be relatively sure that the marginal tax rate on my highest earnings is going to eat up a big portion of them, I will curb my own growth, move (as you see the millionaires flooding out of France), retire to the beach to spend what I've made etc -- at the margins, of course. It isn't just whether the government or Bill Gates can spend Bill Gates' money better (though we know the answer to that), it is whether we will allow another Bill Gates to spring up or whether we'll curb him at Steve Jobs.


2. To your "But my attitude about the growth in incomes of the top 1 percent would probably depend on whether that reflects more entrepreneurial rewards vs. higher executive compensation or investment-banker winnings."

Why? The market rate for executives is determined by supply and demand - regardless of rhetoric. Let the firms decide what its worth to pay - and let those who are made rich by it become the next Bill Gates. Let them steer their companies towad wealth and expansion; let them invest millions in other companies through the stock market; let them steer the Dow Jones toward 12,000; let the market do its thing.

liberty writes:

Sayeth the hairy, cave dwelling libertarian, of course.

Alex writes:

"On the other hand, if the share of income going to the top 1 percent is rising but their contribution to economic growth is not, then some populist resentment is understandable."

As far as i know this is exactly what is happening. There is no real contribution made(of course nominal contribution will be made). Moreover, the top 1% is growing at 12.5% while the remaining 99% at about 2.5%. But the government seems to provide a rosy picture to the people.
Cant anything be done?

Tom Anger writes:

I am not so sure about investment bankers or CEO's of Fortune 500 companies. I think of them as pie-grabbing rather than pie-expanding.

My libertarian instinct is to say "Balderdash! No one is holding a gun to our heads and forcing us to pay investment bankers or CEOs of Fortune 500 companies." But . . . investment bankers work in a regulated industry, and one wonders how much they would make if (a) disintermediation were possible and/or (b) the regulatory barriers to entry were relaxed.

CEOs of Fortune 500 companies (like many other CEOs) have a good thing going for them. They are able to command huge compensation packages not because of their performace but because their boards of directors want to be seen as buying the "best available" talent. "Best available" is defined, to a large extent, by how much an executive is already making. And if he's already making a lot in a company that's performing well (perhaps in spite of his "contributions"), then he advances to the next level of nirvana.

It may be possible and beneficial to eliminate the rent earned by investment bankers and others who benefit from regulations that inhibit competition. I see no safe way of deflating CEO compensation, however; the cure (more government involvement in business decisions) would be worse than the disease.

Half Sigma writes:

"No one is holding a gun to our heads and forcing us to pay investment bankers"

Companies that need their services have no where else to go.

They run an anti-competitive cartel in which they have created high barriers to entry and have a gentleman's agreement not to compete on price.

liberty writes:

"Moreover, the top 1% is growing at 12.5% while the remaining 99% at about 2.5%. " - Alex

Do keep in mind that the picture is not static. The actual individuals in the top 1% and the bottom 99% change every day. The reason growth is so different among the groups is better explained by the dynamic picture: the most productive people in the most productive time of their lives have higher growth than the least productive people in the least producive time of their lives.

This explains the nonlinearity in the growth.

Half Sigma: before you jump in and say that mobility is in decline, do remember that its only relative mobility that is lower in the US than in more socialist countries; dollar mobility is actually higher.

http://economicliberty.net/mobility_stats.htm

(-_-) writes:

I think on this subject it is neccessary to re-evaluate the relationship between the consumer, producer and how one gains wealth. To redistribute the income, as is suggested would hurt not only the Karl Roves, or Bill Gates Himself, but also the consumer. The consumer "trades" money for a product for he feels that is most beneficial to himself.
But I guess this whole argument is invalid, for the company is not one with the man we are squawking at. ...eh? ..yeah thats right.

James writes:

Frankly, my favorite part, but not for the humor, was where DeLong portrays his "inner libertarian" as a caveman. There was a time when the social democrat types argued that unfettered capitalism would impoverish us. When the other side has to sink to this kind of stuff, it strikes me as a good sign.

Jim Abbott writes:

Like so many fuzzy thinkers, 20 % is missing.

Is the missing 20 % 1) Republican
2) Communist
3) Whatever?

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