Percentiles

One of the most striking successes of the Occupy Wall Street movement has been the “We are the 99 per cent” idea, and more specifically in the identification of the top 1 per cent as the primary source of economic problems.


Thanks to #OWS, the fact that households the top 1 per cent of the income distribution now receive around 25 per cent of all income (up from 12 per cent a few decades ago) has been widely disseminated. The empirical work on tax data that produced this evidence, done most notably by Piketty and Saez, has been slowly percolating into the mainstream consciousness, but “We are the 99 per cent” has hammered it home with surprising speed.

Even more surprisingly, the analysis as it relates to the 1 per cent has been almost unchallenged by the organized right. Having spent decades denying the obvious growth in inequality, and of the wealth and power of the super-rich, the right has implicitly conceded to reality on this point.

Their response to ‘We are the 99 per cent’ has been the snarky claim that ‘We are the 53 per cent’. This line is based on the lame and long-refuted  WSJ ‘lucky duckies’ talking point, that low-wage workers ‘pay no income tax’. It is, of course, true that many workers don’t pay the tax called the Federal Income Tax’ , but they do pay the Social Security payroll tax, which is a tax on wage incomes, not to mention sales taxes and many others. By contrast, capital gains, the preferred income source of the ultra-wealthy, are not subject to payroll tax and attract only half the standard rate of the Federal Income Tax.

What’s more interesting to me is the 53 per cent number, redolent of the Buchanan-Nixon plan to ‘tear the country in half and take the bigger half’. It stands in stark contrast to the hypocritical complaints of Republican politicians about class warfare and turning Americans against each other. The fact that anyone could see this slogan as clever politics is an indication of the costs that are eventually incurred in the creation of a hermetically sealed thought bubble like that of the US right.

Coming back to reality, I’d like to think a bit about the relationship between the 1 per cent and the remaining 19 per cent of the population in the top quintile (that is 20 per cent). Most if not all of the bloggers here at CT fall into the latter group. Given our lamentable lack of market research, I can’t say much about readers, but a reading of the comment section suggests that most of our readers also belong to this group.

 The top quintile as a whole commands the great majority of US income, and virtually all financial wealth – few households outside this group own much beyond their homes and perhaps some money in a pension fund. It follows that any significant improvement in public services, or in the position of the unemployed and poor, must be funded by higher taxes on the 1 per cent, the 19 per cent or both.

The 19 per cent also have a disproportionate political weight, since they are much more likely than Americans in general to register, vote and engage in political activity. So, it makes a big difference whether, as as implied by ‘We are the 99 per cent’ their interests are aligned with the mass of the population or with the top 1 per cent.

Until quite recently, I would have (and did) argued against this view. The top quintile as a whole has done very well over the past few decades, and (despite some silly claims to the contrary), high-income earners have mostly voted Republican, in line with their economic interests. Certainly there are plenty who don’t vote their interests, but that is also true of many people in the top 1 per cent, not to mention bona fide billionaires like Buffett and Soros.

There was always an argument in terms of enlightened self-interest or class-interest, that it was better to give up a bit of (pre-tax and post-tax) income to maintain a stable and relatively egalitarian society. But in an individualistic society like that of the US such arguments don’t go very far.

As far as policy is concerned, my implicit assumption, formed in a relatively egalitarian society, was that taxes imposed only on the very rich might be satisfying but couldn’t raise a lot of money. So, for example, I dismissed Obama’s focus on ending the Bush tax cuts for incomes above $250k (roughly, the top 2 per cent). In the ‘Trickle Down’ chapter of Zombie Economics, I looked mainly at the top 20 per cent (or sometimes 10 per cent) of the income distribution rather than the top 1 per cent.

I’m now much more sympathetic to the ‘99 per cent’ analysis. First, a closer look at income growth figures suggests that, while the 19 per cent have enjoyed rising incomes, they’ve only barely maintained their share of national income. The redistribution of the past three decades has gone from the bottom 80 per cent to the top 1 per cent.

That suggests the possibility of a policy response in which the main redistributive thrust would be to reverse this process.  This would almost certainly involve higher tax payments, but this would be offset by the restoration of public services, which are in economic terms a ‘superior good’, valued more as income rises. The top 1 per cent can buy their own services, and are largely unaffected by public sector cutbacks, but that’s not true of the 19 per cent.

Another important factor is the growth of economic insecurity. The myth of the US as a land of opportunity for upward mobility has been replaced by Barbara Ehrenreich’s Fear of Falling (another good source on this is High Wire by Peter Gosselin). Even if people in the top 19 per cent are doing well, they are less secure than at any time since the 1930s, and their children face even more uncertain prospects.

Finally, there is the alliance of the 1 per cent with the forces of rightwing cultural tribalism. The 1 per cent can only rule by persuading lots of people to vote against their interests, and that requires a reactionary and anti-intellectual agenda on social, cultural and scientific issues. As a result, educated voters have increasingly turned against the Republican Party.

I don’t want to make too much of this last point. As Allan Grayson said during his memorable takedown of PJ O’Rourke recently, the 1 per cent own the Republican Party outright, but they also own much of the Democratic Party, and can rule satisfactorily through either. Also, having a college degree isn’t the same as being educated – Tea Party supporters are more likely than the average American to have a degree, and college-graduate Republicans are even more prone to various delusional beliefs on issues such as climate change.

Nevertheless, taking account of all the factors listed above, even the most comfortably affluent members of the professional class, looking at the alliance of plutocrats and theocrats arrayed to defend Wall Street could reasonably conclude that it was in their own interests to support the 99 per cent and not the 1 per cent.

We are therefore (surprisingly to me) suddenly back in a situation where a progressive movement can reasonably claim to act in the interests of a group that is (I’m quoting Erik Olin Wright from memory on the Marxist conception of the working class0
(a) the overwhelming majority of the population
(b) responsible for nearly all the productive activity (as against the 1 per cent’s incomes drawn from a parasitic financial sector)
© economically desperate or at risk of becoming so.

Can all of this be sustained? I don’t know, any more than anyone else. But #OWS has already achieved things that most people would have regarded as impossible a month ago, and for the moment at least, the momentum is still growing.

(Hopefully links to come when I get a bit more time)

340 thoughts on “Percentiles

  1. Chris I didn’t mean to suggest that we adopt buddhism as a religion! Those stories sound awful but they belong to the religion of buddhism. The philosophy is different; http://plato.stanford.edu/entries/comparphil-chiwes/

    We could look at some of the knowledge that the buddhist tradition and some of the other Chinese philosophies developed about keeping governments benign. I think they had long periods of stable governments so they might have something to offer but I am in no way knowledgable about Chinese history or the philosophy. It is a huge area but I was intrigued to find, in my mind anyway, some interesting similarities between Spinoza and aspects of Chinese buddhism.

    And sure ‘mindfullness’ is the therapy of choice of the worried wealthy well, but the practice, silly as it is, parts of it work for youngest son, a hands on youth worker who cares too much; not about alleviating suffering in the no-hoper disabled class he knows and loves, but about how much suffering there is and that there really is nothing available that does alleviate it.

  2. Mulga Mumblebrain is pemanently banned. I’m deleting all his recent comments and replies to those comments.

  3. @Jarrah

    “You’ve got it backwards. If those at the bottom had more resources, inequality would lessen. Inequality is just a measurement, not a determinant! We’re just going around in circles here.”

    Agreed, however that just implies the market has not been allocating resource effectively for the past 30 years, because the government has not intervene with the market in relation to income redistribution such as raising minimum wage, changing tax rate to more progressive tax rate etc. This by itself already proves that market is ineffective at resource allocation without government interventions (hence liberalism/capitalism does not work).

    If you take the case in Australia, minimum wage has improved, progressive tax, and transfers,welfare increases over time, and public healthcare etc are all government intervention with the market. The result? Well is Australia facing the same problem as the US? It is fair to say Australia is not a capitalist society, it is combined with a major right (liberals), center-right (labour), and a minority left (green, independent).

    Inequality is a measurement however, if it is not natural generated inequality such as difference in work duties, pressures, responsibilities and performance etc. It is harmful to the long run economic stability of the economy; and a deregulated market generates more abnormal inequality than a more regulated market (US:Australia).

  4. “This by itself already proves that market is ineffective at resource allocation without government interventions (hence liberalism/capitalism does not work)…and a deregulated market generates more abnormal inequality than a more regulated market (US:Australia).”

    I disagree strongly with your premises, but we are straying far from the original topic, so I’ll leave that for another time unless you want to continue in the Sandpit.

    I’m glad we are in agreement on inequality being just a measurement, not a determinant. One or two others have agreed with this basic point as well. Overall, I consider this to be a very successful foray into the blog jungle.

    Peace out.

  5. @Jarrah

    Sure, I’d love to discuss with you on the topic “Is the market more efficient in allocating resources relating to income in a more deregulated economy than a regulated economy”; that is if you are willing to spend time on discussing it with me in the Sandpit.

    To point out, I have always agreed that natural inequality should exist.

  6. @Tom

    Surely a regulated monopoly where the price = average total cost is the most efficient of all.

    How can you get more efficient than this.

    I suppose you can always fiddle with the concept of efficiency.

  7. @Chris Warren

    I’m not suggestings regulated monopoly, competition will have to exists as a mean to control inflation and improve efficiency. However market liberalism/capitalism generally implies the government should have as little regulations on the market as possible, even if some regulations benefits the economy.

    Now, for example a lot of countries around the world is trying to get China to float the RMB. Why because local business are having trouble competing with Chinese exports, and low labour cost due to manuiplated currency. Now assume that if the Chinese government did float it’s currency and it rose to the estimate that it should worth 40% more than it current is. A lot of the manufacturing plants imported from other countries will move to somewhere else with cheaper labour, further more the demand for Chinese export will decrease which will significantly increase it’s unemployment rate. You have to know that a lot of rural population of China lives on the imported manufacturing plants on $1 per hour. This is a classic example how Chinese government used regulations that benefits the economy.

    No doubt, heavy regulations harms the economy however I believe there should be a equilibrium between regulations/deregulations; which means that an economy should not be heavily regulated nor it should be purely free.

  8. Apologies for correction, “should be a equilibrium between regulations/deregulations” should be level of regulation/macroeconomic stability.

  9. The market allocates resources to their highest value use. The poor don’t have any resources simply because they don’t value them highly enough as indicated by their unwillingness to purchase them at market prices. No injustice; any resulting inequality is entirely fair and choice driven. We are all free to choose. All is well in the world.

    See, simple as that; economics explains all.

  10. @Tom

    Personally, I think regulation does more good than harm, once you understand the huge damage being wrought through deregulation, or at least, the gaming strategies people adopt in a deregulated environment.

    However regulation tends to smother innovation which is the main source of real growth.

    Maybe it is best to avoid the “market liberalism/capitalism” couplet unless you want to restrict market liberalism to just capitalism. In this case the role for regulation is even stronger.

    Normal market liberalism can exist outside capitalism.

  11. @Chris Warren

    Thanks for the advice, I agree wtih your point. I’ll avoid market liberalism/capitalism now and stick with capitalism.

    Also agreeing that regulation do more good than harm; however in what I meant by heavy regulation though is something like price controls and wage controls. These can be really effective if it is use properly; but it is hard to measure the quality/cost of good or productivity/performance of a particular worker. Which if not measured properly it will create disincentives for businesses to differentiate their product via quality; same goes to worker.

  12. Dan I enjoyed the article, thanks.

    This quote:
    “Whenever we diminish equality of opportunity, it means that we are not using some of our most valuable assets—our people—in the most productive way possible”
    is particularly relevant from my perspective. When we abuse people for being dole bludgers, stupid, lazy, luvies, whatever the term of abuse is, we diminish their ability to contribute whatever it is that they have to contribute.

    And this quote makes it clear that the idea of equality is a desirable goal, for self-interested people, and not just for the luvies.

    “ Alexis de Tocqueville once described what he saw as a chief part of the peculiar genius of American society—something he called “self-interest properly understood.” The last two words were the key. Everyone possesses self-interest in a narrow sense: I want what’s good for me right now! Self-interest “properly understood” is different. It means appreciating that paying attention to everyone else’s self-interest—in other words, the common welfare—is in fact a precondition for one’s own ultimate well-being. Tocqueville was not suggesting that there was anything noble or idealistic about this outlook—in fact, he was suggesting the opposite.”

    Spinoza :), I think was making the same argument and that a government was the only way to ensure that everyone’s self-interest could be achieved.

    Also, if one is interested in self-organisation and believes that this process can achieve a good society, the idea of the common welfare as a precondition for one’s own well-being, is the mutual goal that they need.

  13. this is a cross post because i suspect my original post will be deleted from the site i posted on

    here is the original post

    http://blog.mises.org/18826/the-obession-with-equality/comment-page-1/#comment-806741

    here is what my comment said (ps, feel free to jump onto the mises site and have a go at them – but keep the flaming down else they’ll for sure lock out comments)

    ————————————————————————————————– post start —
    My question is this

    exactly what is wrong with equality? Not that i believe that either equality or inequality will matter much in the big picture – in the end we are all dead and i do not mean in Keynes’ way.

    What is clear to me is that when there’s lots of fat to go around the fact that some scum bags make and hoard a lot more than the average Joe is something everyone can live with – simply because they can live

    but when the pie to be shared starts to shrink things get a little more dramatic – no matter whether or not those with most of the pie are losing their share to a shrinking pie or to those who’s shrinking portion drives them to try and get more of anybody else’s share of the pie, they are going to try and hold on to their share – rationality will never come into it

    in the dim dark ages past when there were so few of us that to lose any of us was a threat to all of us it was normal to pull together

    but when there are so many of us that risk seems to no longer exist and with it has gone the care for others exemplified by by the attitudes of some who post to this blog – whatever huff and puff reactions they might make to my assertion (and yes i do know them all – being as well schooled in Libertarianism as any)

    you might think that you are a survivor and that that survival is all because of something about you that makes you superior – and heck it aint hard to feel superior to many of the countless no-hopers and low-lifes out there

    but the fact is that when it all turns to poo it will be the animal in us all that determines the outcome and not the godliness – by forever walling off those with little pie from those of us who have been lucky enough to have more of it all that happens is the wall gets more and more expensive and eventually it falls and leaves us to deal with reality tooth and nail

    that is our future buddies and no amount of ideology is ever going to keep it at bay for long

    so as you see and hear more and more calls for equality – instead of looking for the flaws in the rationality or ethics of the messengers you’d better step back and think about how we all might survive – as a species – as a civilisation

    because as Friedman conceded on his death bed – if we had true democracy there would be no inequality (and your sneaky side-step use of 50-50 hides the truth) – the masses we deny any share of the shrinking pie to would legally vote themselves more of the pie

    so you better either figure out how to make a bigger pie (which seems to be physically impossible) or to ensure there are far far fewer of us to have to share it

    and to do so without resorting to where your ideology must logically lead – pogroms and “demographic cleansing”

    pop

    i’ve often wondered if the peak of population looms
    and our time is bright but short just like a fleeting flower blooms
    and maybe there’s no going back the tipping point’s been crossed
    ’cause we’re all of us the most we’ll be – peak people

    http://thepeakoilpoet.blogspot.com/2011/08/peak-people.html

    http://thepeakoilpoet.blogspot.com/2011/10/equality.html

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