Excerpt #1 from "Defending the One Percent" by N. Gregory Mankiw
The Big Tradeoff
In the title of his celebrated 1975 book, Arthur Okun told us that the “big tradeoff” that society
faces is between equality and efficiency. We can use the government’s system and taxes and
transfers to move income from the rich to the poor, but that system is a “leaky bucket.” Some of
the money is lost as it is moved. This leak should not stop us from trying to redistribute, Okun
argued, because we value equality. But because we are also concerned about efficiency, the leak
will stop us before we fully equalize economic resources.
The formal framework that modern economists use to address this issue is that proposed by
Mirrlees (1971). In the standard Mirrlees model, individuals get utility from consumption C
and disutility from providing work effort L. They differ only according to their productivity W.
In the absence of government redistribution, each person’s consumption would be WL. Those
with higher productivity would have higher consumption, higher utility, and lower marginal
utility.
The government is then introduced as a benevolent social planner with the goal of maximizing
total utility in society (or, sometimes, a more general social welfare function that could depend
nonlinearly on individual utilities). The social planner wants to move economic resources from
those with high productivity and low marginal utility to those with lower productivity and higher
marginal utility. Yet this redistribution is hard to accomplish, because the government is
assumed to be unable to observe productivity W; instead, it observes only income WL, the
product of productivity and effort. If it redistributes income too much, high productivity
individuals will start to act as if they are low productivity individuals. Public policymakers are
thus forced to forgo the first-best egalitarian outcome for a second-best incentive-compatible
solution. Like a government armed with Okun’s leaky bucket, the Mirrleesian social planner
redistributes to some degree but also allows some inequality to remain.
If this framework is adopted, then the debate over redistribution turns to questions about key
parameters. In particular, optimal redistribution depends on the degree to which work effort
responds to incentives. If the supply of effort is completely inelastic, then the bucket has no leak,
and the social planner can reach the egalitarian outcome. If the elasticity is small, the social
planner can come close. But if work effort responds substantially to incentives, then the bucket is
more like a sieve, and the social planner should attempt little or no redistribution...
Another problem with the Mirrlees framework as typically implemented is that it takes a
simplistic approach to tax incidence. Any good introductory student of economics knows that
when a good or service is taxed, the buyer and seller share the burden. Yet in the Mirrlees
framework, when an individual’s labor income is taxed, only the seller of the services is worse
off. In essence, the demand for labor services is assumed to be infinitely elastic. A more general
set of assumptions would acknowledge that the burden of the tax is spread more broadly to
buyers of those services (and perhaps to sellers of complementary inputs as well). In this more
realistic setting, tax policy would be a less well-targeted tool for redistributing economic
wellbeing.
Excerpt #2 from "Defending the One Percent" by N. Gregory Mankiw
Listening to the Left
It is, I believe, hard to square the rhetoric of the left with the economist’s standard framework.
Someone favoring greater redistribution along the lines of Okun and Mirrlees would argue as
follows. “The rich earn higher incomes because they contribute more to society than others do.
However, because of diminishing marginal utility, they don’t get much value from their last few
dollars of consumption. So we should take some of their income away and give it to less
productive members of society. While this policy would cause the most productive members to
work less, shrinking the size of the economic pie, that is a cost we should bear, to some degree,
to increase utility for society’s less productive citizens.”
Surely, that phrasing of the argument would not animate the Occupy crowd! So let’s consider the
case that the left makes in favor of greater income redistribution...
[One] type of argument from the left is that the incomes of the rich do not reflect their
contributions to society. In the standard competitive labor market, a person’s earnings equal the
value of his or her marginal productivity. But there are various reasons that real life might
deviate from this classical benchmark. If, for example, a person’s high income results from
political rent-seeking rather than producing a valuable product, the outcome is likely to be both
inefficient and widely viewed as inequitable. Steve Jobs getting rich from producing the iPod
and Pixar movies does not produce much ire among the public. A Wall Street executive
benefiting from a taxpayer-financed bailout does.
The key issue is the extent to which the high incomes of the top 1 percent reflect high
productivity rather than some market imperfection. This question is one of positive economics,
but unfortunately not one that is easily answered. My own reading of the evidence is that most of
the very wealthy get that way by making substantial economic contributions, not by gaming the
system or taking advantage of some market failure or the political process. Take the example of
pay for chief executive officers. Without doubt, CEOs are paid handsomely, and their pay has
grown over time relative to that of the average worker. Commentators on this phenomenon
sometimes suggest that this high pay reflects the failure of corporate boards of directors to do
their job. Rather than representing shareholders, the argument goes, boards are too cozy with the
CEOs and pay them more than they are worth to their organizations. Yet this argument fails to
explain the behavior of closely-held corporations. A private equity group with a controlling
interest in a firm does not face the alleged principal-agent problem between shareholders and
boards, and yet these closely-held firms also pay their CEOs handsomely. Indeed, Kaplan (2012)
reports that over the past three decades, executive pay in closely-held firms has outpaced that in
public companies. Conqvist and Fahlenbrach (2012) find that when public companies go private,
the CEOs tend to get paid more rather than less in both base salaries and bonuses. In light of
these facts, the most natural explanation of high CEO pay is that the value of a good CEO is
extraordinarily high (a conclusion that, incidentally, is consistent with the model of CEO pay
proposed by Gabaix and Landier, 2008).
Excerpt #3 from "Defending the One Percent" by N. Gregory Mankiw
The Need for an Alternative Philosophical Framework
A common thought experiment used to motivate income redistribution is to imagine a situation
in which individuals are in an “original position” behind a “veil of ignorance” (as in Rawls,
1971). This original position occurs in a hypothetical time before we are born, without the
knowledge of whether we will be lucky or unlucky, talented or less talented, rich or poor. A riskaverse person in such a position would want to buy insurance against the possibility of being
born into a less fortunate station in life. In this view, governmental income redistribution is an
enforcement of the social insurance contract to which people would have voluntarily agreed in
this original position.
Yet take this logic a bit further. In this original position, people would be concerned about more
than being born rich and poor. They would also be concerned about health outcomes. Consider
kidneys, for example. Most people walk around with two healthy kidneys, one of which they do
not need. A few people get kidney disease that leaves them without a functioning kidney, a
condition that often cuts life short. A person in the original position would surely sign an
insurance contract that guarantees him at least one working kidney. That is, he would be willing
to risk being a kidney donor if he is lucky, in exchange for the assurance of being a transplant
recipient if he is unlucky. Thus, the same logic of social insurance that justifies income
redistribution similarly justifies government-mandated kidney donation. No doubt, if such a
policy were ever seriously considered, most people would oppose it. A person has a right to his
own organs, they would argue, and a thought experiment about an original position behind a veil
of ignorance does not vitiate that right. But if that is the case, and I believe it is, it undermines
the thought experiment more generally. If imagining a hypothetical social insurance contract
signed in an original position does not supersede the right of a person to his own organs, why
should it supersede the right of a person to the fruits of his own labor?
An alternative to the social insurance view of the income distribution is what, in Mankiw (2010),
I called a “just deserts” perspective. According to this view, people should receive compensation
congruent with their contributions. If the economy were described by a classical competitive
equilibrium without any externalities or public goods, then every individual would earn the value
of his or her own marginal product, and there would be no need for government to alter the
resulting income distribution. The role of government arises as the economy departs from this
classical benchmark. Pigovian taxes and subsidies are necessary to correct externalities, and
progressive income taxes can be justified to finance public goods based on the benefits principle.
Transfer payments to the poor have a role as well, because fighting poverty can be viewed as a
public good (Thurow 1971).
To highlight the difference between these approaches, consider how each would address
the issue of the top tax rate. In particular, why shouldn’t we raise the rate on high incomes to 75
percent, as France’s President Hollande has recently proposed, or to 91 percent, where it was
through much of the 1950s in the United States? A utilitarian social planner would say that
perhaps we should and would refrain from doing so only if the adverse incentive effects were too
great. From the just-deserts perspective, such confiscatory tax rates are wrong, even ignoring any
incentive effects. By this view, using the force of government to seize such a large share of the
fruits of someone else’s labor is unjust, even if the taking is sanctioned by a majority of the
citizenry.
"Hiring Women and the Moral Inversion of Economics" by Alex Tabarrok
http://marginalrevolution.com/marginalrevolution/2014/09/hiring-women-and-the-moralinversion-of-economics.html
In my post on why economics is detested I quoted Arnold Kling:
The intention heuristic says that if the intentions of an act are selfless and well-meaning,
then the act is good. If the intentions are self-interested, then it is not good.
In contrast, economics evaluates an act not by its intentions but by its consequences.
Since “bad” intentions can lead to good consequences (“as if by an invisible hand”). It’s not
surprising that economists often praise what others denounce. Here’s a case in point:
At a Sydney technology startup conference, Evan Thornley, an Australian
multimillionaire and co-founder of online advertising company LookSmart (LOOK), gave a talk
about why he likes to hire women. “The Australian labor market and world labor market just
consistently and amazingly undervalues women in so many roles, particularly in our industry,”
he said. When LookSmart went public on Nasdaq in 1999, he said, it was one of the few tech
companies that had more women than men on its senior management team. “Call me
opportunistic; I thought I could get better people with less competition because we were willing
to understand the skills and capabilities that many of these woman had,” Thornley said.
…Thornley went on to say that by hiring women, he got better-qualified employees to
whom he was able to give more responsibility. “And [they were] still often relatively cheap
compared to what we would’ve had to pay someone less good of a different gender,” he
concluded. To illustrate his point he showed a slide that said: “Women: Like Men, Only
Cheaper.”
For his comments, Thornley’s was labelled a sexist and loudly denounced, especially so
by furious women. Strange? Not according to the intention heuristic which judges self-interested
actions as bad.
If we judge actions by consequences, however, Thornley should be encouraged, perhaps
even praised. Accepting for the sake of argument the truth of the story, it’s Thornley who has
overcome prejudice (his or his society’s), recognized the truth of equality and taken
entrepreneurial action to do well while doing good. It’s Thornley who is broadcasting the fact of
equality to the world and encouraging others to do likewise. Most importantly, the consequence
of Thornley’s actions are to increase the demand for women executives thereby increasing their
wages.
Women’s wages aren’t pushed down by employers who hire women but by employers
who don’t hire women. So why does Thornley get the blame? Instead of denouncing Thornley,
whose actions push up the wages of women he hires and the wages of the women he does not
hire, why not ask, How can we encourage employers not to overlook talented women and
minorities?
For those wanting to break the bonds of discrimination whether they be women, blacks or
Dalits, lower wages and a competitive market aren’t the cost of discrimination but the cure. It’s
the lower wages that give employers an incentive to overcome prejudice, seek out talent, and
experiment with new ways of doing business. And it is the self-interested pursuit of profit that is
the surest means to increase the wages of the unjustly ignored and overlooked.
"In 2011, Romney made $14 million while being unemployed" by Ezra Klein
http://www.washingtonpost.com/blogs/wonkblog/wp/2012/09/21/in-2011-romney-made-14million-while-being-unemployed/
The focus on Romney's tax returns is on how much he pays. But look at the other side of the
ledger: how much he makes. In 2011, Romney earned $14 million. But as Romney himself joked
in 2011, he was unemployed that year. So he made $14 million without even having a job.
That money, of course, all came from investments. But Romney didn't even manage those
investments. Someone else took charge of the decisions. Romney basically made $14 million in
2011 -- putting him way, way above the top 1 percent, which starts at around $350,000 a year -because Romney was very rich in 2010, too. That's the nice thing bout being rich: It makes you
richer.
"A Black College Student Has The Same Chances Of Getting A Job As A White High
School Dropout" BY ABIGAIL BESSLER
http://thinkprogress.org/education/2014/06/25/3452887/education-race-gap/
African-American students need to complete two more levels of education to have the same
probability of getting a job as their white peers, a new study by Young Invincibles finds.
The researchers looked at data mainly from the Bureau of Labor Statistics and the U.S. Census,
isolating the effects of race and education on unemployment. They found that an AfricanAmerican male with an associates degree has around the same chance of getting a job as a white
male with just a high school diploma. “At every level of education, race impacts a person’s
chance of getting a job,” Tom Allison, a research manager and one of the study’s authors, told
ThinkProgress.
The gap in employment chances between
whites and African Americans leads to a huge
gap in unemployment rates, even long after the
recession. In May of this year, AfricanAmerican millennials faced a 16.6 percent
unemployment rate, compared to a 7.1 percent
rate for whites of the same age range (18 to 34
years old).
The study attributes the employment gap
mainly to hiring discrimination, high
incarceration rates for black people, and
African Americans’ lack of inherited wealth
from past generations due to a long history of discrimination. Less inherited wealth results in low
homeownership rates and high deficits among African Americans: While a college-educated
white American has an average net worth of $75,000, a college-educated black American has a
net worth of less than $17,500...
African Americans are much less likely to attain higher education degrees than whites, even
though such degrees are becoming more and more valuable compared to high school degrees.
According to Census Bureau data, blacks are almost twice as likely as whites to drop out of high
school and are half as likely to get a post-baccalaureate degree.
As for solutions, Young Invincibles suggests early counseling to raise awareness of the benefits
of college for African American students, more investment in community colleges and Pell
Grants, and the implementation of alternatives to Affirmative Action for increasing diversity in
states where Affirmative Action has been banned.
"The Pay-for-Performance Myth" By Eric Chemi and Ariana Giorgi
http://www.businessweek.com/articles/2014-07-22/for-ceos-correlation-between-pay-and-stockperformance-is-pretty-random
With all the public chatter about exorbitant executive compensation and income inequality, it’s
useful to look at the relationship between chief executive officer pay and corporate performance.
Typically, when the subject of their big pay packages arises, CEOs—usually through their
spokespeople—say they are paid for performance. Does data back that up?
An analysis of compensation data publicly released by Equilar shows little correlation between
CEO pay and company performance. Equilar ranked the salaries of 200 highly paid CEOs. When
compared to metrics such as revenue, profitability, and stock return, the scattering of data looks
pretty random, as though performance doesn’t matter. The comparison makes it look as if there
is zero relationship between pay and performance.
Check the comparison of the ranking of the 200 CEOs Equilar looked at to their company’s stock
returns, as seen on the chart below. The trend line—the average of how much a CEO’s ranking is
affected by stock performance—shows that a CEO’s income ranking is only 1 percent based on
the company’s stock return. That means that 99 percent of the ranking has nothing to do with
performance at all. (The size and profitability of companies didn’t affect the random patterns.)
If “pay for performance” was really a factor in compensating this group of CEOs, we’d see
compensation and stock performance moving in tandem. The points on the chart would be
arranged in a straight, diagonal line. They certainly wouldn’t look like this:
"The Real Story Behind Executive Pay" By Steven N. Kaplan
http://www.foreignaffairs.com/articles/139101/steven-n-kaplan/the-real-story-behind-executivepay
Part of the problem, allegedly, is that the corporate boards that determine CEOs’ pay
packages have severed the link between salary and achievement. Lucian Bebchuk and Jesse
Fried, authors of the 2004 book Pay Without Performance, conclude that “flawed compensation
arrangements have not been limited to a small number of ‘bad apples’; they have been
widespread, persistent, and systemic.”... Economists such as these argue that although CEOs are
in theory beholden to the boards that hire and fire them, often the reverse is true, with directors
striking sweetheart deals to stay in the good graces of powerful executives. If only corporate
boards broke free from their executive captors, the logic goes, CEOs would get a taste of
accountability, their pay would return to earth, and the growing gap between the rich and the
poor could begin to narrow...
It is impossible to deny that the United States’ corporate executives are paid handsomely.
And there have been high-profile examples of overly generous boards. Yet the idea that CEOs’
high incomes are primarily the product of failures of corporate governance is a myth. Rather,
CEOs of public companies have benefited from an increasingly remunerative market for top
talent. As technology has improved and companies have grown larger and more efficient,
incomes among the country’s other top earners -- private-company executives, corporate
lawyers, hedge fund managers, and investors -- have also risen. In other words, high incomes in
the United States, and the accompanying inequality, stem from broader market forces, not from
quirks or imperfections in the U.S. corporate governance system. Attempts to reduce top
executive pay through additional regulation will only risk driving skilled public-company
executives to apply their talents elsewhere...
Although CEO pay has recently fallen, it remains very high in an absolute sense. In 2010,
the average S&P 500 CEO took home more than $10 million, roughly 200 times the income of a
typical U.S. household. Especially since the 1990s, CEOs have done extremely well for
themselves. The important question is, why?
The most compelling answer involves market forces, not corrupt corporate boards.
Specifically, improvements in technology and the growth in the size of firms and the scale of
finance have allowed more talented people to increase their productivity relative to others. The
larger the company, the greater the returns to hiring a productive CEO. And as firms have
become more valuable, boards have responded by spending more to attract talent that can affect
that value.
"How Superstars’ Pay Stifles Everyone Else" by Eduardo Porter
http://www.nytimes.com/2010/12/26/business/26excerpt.html?pagewanted=all
IN 1990, the Kansas City Royals had the heftiest payroll in Major League Baseball:
almost $24 million. A typical player for the New York Yankees, which had some of the most
expensive players in the game at the time, earned less than $450,000. Last season, the Yankees
spent $206 million on players, more than five times the payroll of the Royals 20 years ago, even
after accounting for inflation. The Yankees’ median salary was $5.5 million, seven times the
1990 figure, inflation-adjusted. What is most striking is how the Yankees have outstripped the
rest of the league. Two decades ago. the Royals’ payroll was about three times as big as that of
the Chicago White Sox, the cheapest major-league team at the time. Last season, the Yankees
spent about six times as much as the Pittsburgh Pirates, who had the most inexpensive roster.
Baseball aficionados might conclude that all of this points to some pernicious new trend
in the market for top players. But this is not specific to baseball, or even to sport. Consider the
market for pop music. In 1982, the top 1 percent of pop stars, in terms of pay, raked in 26 percent
of concert ticket revenue. In 2003, that top percentage of stars — names like Justin Timberlake,
Christina Aguilera or 50 Cent — was taking 56 percent of the concert pie...
Nearly 30 years ago, Sherwin Rosen, an economist from the University of Chicago,
proposed an elegant theory to explain the general pattern. In an article entitled “The Economics
of Superstars,” he argued that technological changes would allow the best performers in a given
field to serve a bigger market and thus reap a greater share of its revenue. But this would also
reduce the spoils available to the less gifted in the business. The reasoning fits smoothly into the
income dynamics of the music industry, which has been shaken by many technological
disruptions since the 1980s. First, MTV put music on television. Then Napster took it to the
Internet. Apple allowed fans to buy single songs and take them with them. Each of these
breakthroughs allowed the very top acts to reach a larger fan base, and thus command a larger
audience and a bigger share of concert revenue.
IF one loosens slightly the role played by technological progress, Dr. Rosen’s framework
also does a pretty good job explaining the evolution of executive pay. In 1977, an elite chief
executive working at one of America’s top 100 companies earned about 50 times the wage of its
average worker. Three decades later, the nation’s best-paid C.E.O.’s made about 1,100 times the
pay of a worker on the production line. This has separated the megarich from the merely very
rich. A study of pay in the 1970s found that executives in the top 10 percent made about twice as
much as those in the middle of the pack. By the early 2000s, the top suits made more than four
times the pay of the executives in the middle.
Top C.E.O.’s are not pop stars. But the pay for the most sought-after executives has risen
for similar reasons. As corporations have increased in size, management decisions at the top have
become that much more important, measured in terms of profits or losses. Top American
companies have much higher sales and profits than they did 20 years ago. Banks and funds have
more assets. With so much more at stake, it has become that much more important for companies
to put at the helm the “best” executive or banker or fund manager they can find. This has set off
furious competition for top managerial talent, pushing the prices of top-rated managers way
above the pay of those in the tier just below them. Two economists at New York University,
Xavier Gabaix and Augustin Landier, published a study in 2006 estimating that the sixfold rise in
the pay of chief executives in the United States over the last quarter century or so was
attributable entirely to the sixfold rise in the market size of large American companies.
"Labor's Declining Share of Income and Rising Inequality" by Cleveland Federal Reserve
http://www.clevelandfed.org/research/commentary/2012/2012-13.cfm
Labor income has declined as a share of total income earned in the United States. This
decline was caused by several factors, including a change in the technology used to produce
goods and services, increased globalization and trade openness, and developments in labor
market institutions and policies.
One consequence of the labor share decline has raised concerns. Since labor income is
more evenly distributed across U.S. households than capital income, the decline made total
income less evenly distributed and more concentrated at the top of the distribution, and this
contributed to increased income inequality...
Household income comes in two types: labor income, which includes wages, salaries, and
other work-related compensation (such as pension and insurance benefits and incentive-based
compensation), and capital income, which includes interest, dividends, and other realized
investment returns (such as capital gains). During the last three decades, labor’s share of total
income has declined in favor of capital income.
... data sources measure slightly different labor share
concepts, which is why their estimated levels are
different. But they agree in indicating a significant drop
of 3 to 8 percentage points in labor’s share of income
since the early 1980s, with the trend accelerating during
the 2000s.
Such a decline had implications for the
distribution of incomes. Labor income is more evenly
distributed across U.S. households than capital income,
while a disproportionately large share of capital income
accrues to the top income households. As the share that is
more evenly distributed declined and the share that is
more concentrated at the top rose, total income became less evenly distributed and more
concentrated at the top. As a result, total income inequality rose.
Several indicators suggest that inequality was declining up to the late 1970s, but it has
since reversed course. It rose sharply during the 1980s and early 1990s and currently is at near
record-high levels. Between 1967 and 1980, the average real income of the bottom 20 percent of
households grew by 1.34 percent [per year], faster than the 1.09 percent growth rate of the top 20
percent and the 0.67 percent of the top 5 percent. After 1980, however, the opposite occurred:
Average real income grew by 0.05 percent only for the bottom 20 percent of households, while it
grew by 1.24 percent for the top 20 percent and by 1.67 percent for the top 5 percent (DeNavasWalt et al. 2011). The share of income earned by the top-income households rose significantly
after 1980, while the share earned by the bottom-income households declined.
"The wedges between productivity and median compensation growth" By Lawrence
Mishel http://www.epi.org/publication/ib330-productivity-vs-compensation/
[Worker] productivity growth has risen substantially over
the last few decades but the hourly compensation of the
typical worker has seen much more modest growth,
especially in the last 10 years or so...
Figure B provides more detail on the productivitypay disparity from 1973 to 2011 by charting the
accumulated growth since 1973 in productivity; real
average hourly compensation; and real median hourly compensation of all workers, and of men
and of women.
First, as shown in Figure B, average hourly
compensation—which includes the pay of CEOs
and day laborers alike—grew just 39.2 percent
from 1973 to 2011, far lagging productivity growth.
In short, workers, on average, have not seen their
pay keep up with productivity. This partly reflects
the first wedge: an overall shift in how much of the
income in the economy is received in wages by
workers and how much is received by owners of
capital. The share going to workers decreased.
Second, as also shown in Figure B, the hourly compensation of the median worker grew
just 10.7 percent... In sum, the median worker (whether male or female) has not enjoyed growth
in compensation as fast as that of higher-wage workers, especially the very highest paid. This
reflects the wedge of growing wage and compensation inequality.
The large productivity-median compensation gap in the 2000–11 period was driven
primarily by growing compensation inequality and the decline in labor’s share of income,
accounting respectively for 38.9 percent and 45.3 percent of the total gap...
The inequality of wages and compensation factor has three different dimensions. The first
is the substantial gap between the growing earnings of the top 1 percent of earners and other high
earners within the upper 10 percent: Between 1979 and 2007 the annual earnings of the top 1
percent grew 156 percent, while the remainder of the top 10 percent had earnings grow by 45
percent. A second dimension has been the continuing gap between the growth of wages at the top
(such as at the 90th and 95th percentiles) and the middle (e.g., the median wage) over the entire
1979–2011 period. The third dimension—the gap between the middle and the bottom (measured
as the gap between the median wage and the 10th percentile wage)—has emerged in some subperiods but not in others. The gap grew strongly in the 1980s but remained flat in the 1990s and
the 2000s, except for a re-emerging gap among men in the last few years.
Wage inequality at the bottom—called the “50/10 wage gap” because it reflects wage
differences between the median and bottom 10 percent—has primarily been driven by periods of
high unemployment and the erosion of the minimum wage. The continuing growth of the wage
gap between high and middle earners is the result of various laissez-faire policies (acts of
omission as well as commission) including globalization, deregulation, privatization, eroded
unionization, and weakened labor standards. The gap between the very highest earners—the top
1 percent—and all other earners, including other high earners, reflects the escalation of CEO and
other managers’ compensation and the growth of compensation in the financial sector.
The myth of wage stagnation by Daniel J. Smith
http://www.cnbc.com/id/101373237
Looking at just average hourly wages — adjusted for inflation using the Consumer Price
Index (CPI) — shows that earnings increased only 5.58 percent since 1964. However, this
statistic and others like it are misleading because they do not factor in new forms of growing
employee compensation and they overstate the erosion of purchasing power. Once these
contributions are taken into account, a much more clear — and positive — picture of the average
incomes surfaces.
Over the last few decades, employees have been receiving an increasingly larger portion
of their overall compensation in the form of benefits such as health care, paid vacation time, hour
flexibility, improved work environments and even daycare. Ignoring the growth of these benefits
and looking at only wages provides a grossly incomplete picture of well-being, and the increase
in compensation for work. While it is difficult to adjust for all of these benefits that workers are
now receiving, one measure of wage and salary supplements show they have nearly tripled since
1964. Total compensation, which adds these benefits to wages and salaries, shows that earnings
have actually increased more than 45 percent since 1964.
Furthermore, "purchasing power," the amount of stuff people can buy with each dollar,
has changed dramatically over the last half decade and, surely, must be considered when
evaluating the state of the average worker based on his or her take-home pay. CPI is notorious
for overstating inflation, and thus understating the growth of real wages received by workers.
Adjusting the data with the more appropriate Personal Consumption Expenditure index brings
the growth in average hourly wages from 5.58 percent to more than 35 percent and the growth in
total compensation of employees from more than 45 percent to more than 87 percent.
But even that index fails to grasp the drastic increase in what workers get for their wages.
According to the economist Mark Perry of the American Enterprise Institute (AEI), 100.5 hours
of work was required to purchase a washing machine in 1959 compared to just 23.3 hours of
work (for the average worker) in 2013. Purchasing a TV demanded an astounding 127.8 hours of
work in 1959, whereas a worker in 2013 could purchase one with only 20.7 hours of work.
Moreover, the improved quality of these goods over the past few decades is staggering.
The first cellphones were bulky, unaesthetic and provided poor cellular service. Today's iPhones
and other smart-phone models seem like a different species from their predecessors both in looks
and capabilities. We've seen the same progress in knee-replacement surgeries, computers, the
Internet, vacuum cleaners, and other technologies we've come to rely on.
Now that we've taken a more honest look at the data, working Americans are clearly
better off today than they were in the 1950s. Claims of wage stagnation are unfounded.
Unfortunately, this myth of wage stagnation is being used to dismantle piecemeal the
very economic freedoms that cause incomes to rise. We see this in proposals to increase the
minimum wage, raise taxes on businesses, and to expand redistribution programs.
"Response To Kliman: Time To Move On" by Sam Gindin
http://www.newleftproject.org/index.php/site/article_comments/response_to_kliman_time_to_move_on
Kliman... focuses instead on household income. This is fair enough when presented with
nuances, but Kliman’s main argument, based on an academic study written to counter the
growing consensus on the fact of rising inequality, is bold and unqualified... Kliman argues that
"[w]hen income is defined in a comprehensive manner, each of the bottom three quintiles
(20% groups) of U.S. households experienced a rise in [real] income of more than 30% between
1979 and 2007, and inequality went into reverse after 1989."
An immediate objection here is that rises in household income may not reflect higher
payment for work as much as more household members working longer hours... The reality is
that in the decades after the 1970s men worked much more overtime and women moved from
part-time to full-time work, increasing their average annual hours by 20%...
The Congressional Budget Office has incorporated, in its own review of inequality
between 1979 and 2007, the methodology of the academic study Kliman cites. Household
incomes did rise over the period but, even after transfer payments (welfare, pensions,
unemployment insurance, etc.) have been added in and after taxes have been deducted, the
widening of inequality over the course of the neoliberal period remains profound. The CBO
summarises the data as follows: "For the 1 per cent of the population with the highest income,
average real after-tax household income grew by 275 per cent between 1979 and 2007. For
others in the 20 per cent of the population with the highest income (those in the 81st through
99th percentiles), average real after-tax household income grew by 65 per cent over that period,
much faster than it did for the remaining 80 per cent of the population."...
Kliman’s suggestion that incorporating transfer payments and tax adjustments would
strengthen his case is belied by the not-surprising reality that this was not a propitious period for
supporting social programs for the poor or levying taxes on the rich. As the CBO study puts it:
"The equalising effect of transfers declined over the 1979-2007 period primarily because
the distribution of transfers became less progressive. The equalising effect of federal taxes also
declined over the period, in part because the amount of federal taxes shrank as a share of market
income and in part because of changes in the progressivity of the federal tax system."
Kliman’s conclusion rests entirely on a further statistical adjustment: the inclusion of
Medicaid and Medicare expenditures in the data. This is a complex issue but, simplifying a bit,
what the researchers from both the CBO and the academic study on which Kliman relies did was
to treat the costs of the health insurance received as income. Since Medicaid goes primarily to
the poor and Medicare is based on age, and since the increase in the numbers on Medicaid and
Medicare have grown faster than the general population, and above all since the cost of health
care has increased very much more than the general rate of inflation – for all these reasons,
treating these health services as private income has a very profound effect on calculations of
income distribution.... by Kliman’s methodology, whether the quality of health care remains the
same or falls if the costs rise, that rise is treated as an increase in working class income. For
Kliman, moreover, this would in turn imply a decrease in profits. But what is actually going on
isn’t a class redistribution of income so much as a redistribution among corporations. Whether
the issue is Medicare, Medicaid or private health insurance, though workers do benefit from
these programs, the rising premiums paid by individuals and corporations and especially the
increased tax dollars paid out by the state contribute mightily to the profits of the private health
insurance industry.