Scott Winship on Extreme High-End Inequality

by Reihan Salam

Scott Winship has a new essay on the implications of high-end inequality:

What to make of the mind-blowing extent to which incomes reach stratospheric heights in America? Conservatives often respond that high-end inequality is not as dramatic as the figures for a single year make it out to be. Economic mobility means that those who are super-rich this year are not next year. There is some merit to this point. Zuckerberg made much less than Romney last year and had less money than you did not too long ago. Romney’s income will dramatically fall if he is hired for the job he is pursuing.

But the evidence suggests that the rich and the super-rich do not move around that much. According to the best study, fully 75 percent of those initially in the top one percent were still in the top five percent after nine years. Among those starting out in the top one percent of the top one percent, 82 percent stayed in the top one percent of all filers and 58 percent stayed in the top ten percent of the top one percent. In terms of the first thought experiment above, where the poorest member of the top one percent was on the top floor of the Burj Khalifa, most mobility among the very rich happens 1,750 feet above floor thirteen, where the median household sits, 150 feet off the ground. When the sky is the limit, there’s lots of room to move up and down without coming near the world’s tallest skyscraper.

Liberals, on the other hand, look at the picture I have sketched with revulsion. But there is little compelling or consistent evidence showing that such extreme inequality-as against, say, European levels or the lower American levels of the 1960s-actually harms the middle class or poor. This is not to say that extreme inequality benefits Americans; it may, but it could simply be tangential to the lives of most people. Will Americans be better off in 2013 if Zuckerberg does not exercise any more stock options? Did the rest of us benefit from 2007 to 2009 when the share of income received by the rich fell? If not, how do we know that we were hurt when the share they received was rising? [Emphasis added] 

In at least one sense, the broader public does benefit when Mark Zuckerberg exercises stock options. California expects the 2012 IPO windfall to stave off deep budget cuts. It is also true, however, that state and local government should generally rely on less volatile (and less mobile) tax bases. A heavy reliance on capital gains at the state level is a recipe for wild oscillations in how much the state government can spend. And of course Californians might benefit when their state government is subject to spending discipline, provided it translates into organizational discipline. This depends on the structure of the state government in question, e.g., whether or not public sector managers have sufficient discretion over staffing levels, work rules, etc. Leaving aside the impact on taxes and transfers, there are other spillovers, both negative (if Robert Frank is right about “expenditure cascades,” for example) and positive (if the concentration of income leads to higher investment levels, and if the resulting investments are growth-enhancing). 

When the numbers are correctly measured, compensation paid to average workers has kept up with increases in the value of what they produce. The very rich receive much of their bounty in the form of capital gains, dividends, and stock options that depend on the rise and fall in the value of investments, as determined by a global economy of savers. These windfalls reflect one part financial market exuberance (irrational or not, hardly a conspiracy among the rich to take from the rest of us) and one part gains from deferred receipt of income-the cost of getting people to loan out their money when there’s a risk it won’t come back. 

To extend Scott’s thought experiment, would we be better off if the windfalls that flow from financial market exuberance in a global economy of savers accrued were diverted away from people residing in U.S. cities to people residing in Toronto or London or Singapore? 

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.