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How to Make It in America, Cont’d



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Yesterday, I wrote about economic mobility in the United States, and defended the claim by Rep. Paul Ryan (R., Wisc.) that America holds greater economic opportunity for its people than does Europe. Someone in the comments thinks that I, like many conservative bloggers, conveniently left out a newly released CBO study showing the huge growth in income inequality in the U.S. since 1979. Here are the top lines from that study drawing all the attention from liberals like my commenter:

CBO finds that, between 1979 and 2007, income grew by:

  • 275 percent for the top 1 percent of households,
  • 65 percent for the next 19 percent,
  • Just under 40 percent for the next 60 percent,
  • and 18 percent for the bottom 20 percent.

So let’s address them in good faith. The good news is that the rising tide, pre-recession, lifted all boats. (Thus are the poorest five percent of Americans still richer than 68 percent of the world). The bad news is that it was probably inefficiently top-heavy. The CBO says that the increasing inequality was driven primarily by business income and capital gains, as opposed to good ol’ fashioned honest “labor income.” The years 1979–2007 indeed corresponded both to a period in which the U.S. economy as a whole grew at a brisk pace (an unmitigated good), and a period in which the size of the financial sector ballooned as a share of the economy (a, well, mitigated good, at best). I don’t know enough — I’m not smart enough — to weigh-in confidently on whether the financial sector was/is too big. On the one hand, a big, creative financial sector should efficiently allocate capital to the best entrepreneurs, and remove barriers to capitalization for entrepreneurs who otherwise may not have been able to bring their products to market. On the other hand, a large and leveraged financial sector (infamously) shackles the health of the overall economy to its own health, greatly amplifying the effects of banking crises. It might also siphon talent away from more socially and economically useful pursuits.1

In any event these are complex issues that conservative wonks should care about. Just as conservative wonks should care about massively disproportionate income gains. It’s (tautologically) true that putting money in the hands of job-creators create jobs. But is a 275-percent gain in income for the top one percent of households required to create that 40 percent gain in income for the middle classes? Is all that accumulated cash likely to be reinvested, or tucked away? Are there free-market-based policies that help channel gains to middle class investors and would-be entrepreneurs, e.g. to those who are most likely to put the marginal dollar to good economic use? Like I said, I’m too dumb to know the answers. But I know we should care about them.

So yes, to my commenter, conservatives should care about the CBO report on income inequality. But there’s another major finding of that report of which liberals should take careful note. Namely:

Government Transfers and Federal Taxes Became Less Redistributive

That’s right, according to that same CBO study, the share of government transfer payments going to the poorest 20 percent of Americans has declined from 50 percent to 35 percent. And the share of those payments going to the wealthiest 80 percent has risen from 50 to 65 percent. In other words, the entitlement state is ever less about keeping the poor out of destitution, and ever more about subsidizing the health care and retirement benefits of the likes of Warren Buffett. Liberals are likely to use the CBO report to buttress the case for taxing “the rich” more. But they ought to think instead about subsidizing them less.

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1. This paper from 2009 sticks with me. It makes the plausible argument that investment banking was basically easy, and boring, in the heavily regulated period between 1930 and 1980; that subsequent deregulation and the rise of exotic financial products created great demand for high-skilled workers, thus increasing both wages and the opportunity for profit in the financial sector; but that, nevertheless, financial workers are overpaid. In part by comparing the compensation of financial workers and engineers with similar innate abilities and education levels, the paper concludes that as much as 30-50 percent of financial compensation is pure rent. That is, the financial sector as a whole could get away with paying workers up to 50 percent less without affecting demand for those jobs.



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