With a lot of attention on the CBO report finding that out that income inequality has increased dramatically in the past 30 years, you might have a momentary lapse and think something like “say, maybe those protesters are onto something.” Resist the urge! A reader pointed us to this from Greg Mankiw, who is presumably planning his counter-demonstration now:

Here is a fact that you might not have heard from the Occupy Wall Street crowd: The incomes at the top of the income distribution have fallen substantially over the past few years.

According to the most recent IRS data, between 2007 and 2009, the 99th percentile income (AGI, not inflation-adjusted) fell from $410,096 to $343,927. The 99.9th percentile income fell from $2,155,365 to $1,432,890. During the same period, median income fell from $32,879 to $32,396.

Take that, Wall Street protesters! Sure, it may suck that you lost your job, but it probably didn’t pay that much anyway. John Paulson has lost millions!

What gives? Mankiw points to this 2010 paper by Jonathan A. Parker and Annette Vissing-Jorgensen as an explanation. Parker and Vissing-Jorgensen demonstrate that, as Mankiw puts it, “high-income households have riskier-than-average incomes.” More specifically, as the share of wealth going to the rich increases, the volatility of rich people’s incomes also increases (both over time and across countries). This effect seems to be pretty recent in the U.S.: “Before the early 1980s, the incomes of high-income households were more often than not less cyclical than the average income of all households. But since around 1982 the incomes of the top 1 percent have become more than twice as sensitive to aggregate income fluctuations as the income of the average household.”

You can imagine various plausible explanations for that, but, just to warn you, P&V-J think you’re probably wrong. For instance, you might say “people in the financial industry make a zillion dollars in boom times and then get only relative pocket change when they blow up their firms.” But they find the effects apply across industries, not particularly concentrated in finance. Or you might say “this is because the rich had a bunch of stocks and stocks went up during that time period” (the CBO study waves in this direction, and by the way stops at 2007 so avoids the whole “and then stocks went down” thing), but nope, P&V-J find that the effect is true for earned income as well as capital gains. Their theory is “that the increase in top income shares was caused by rapid technological progress in information and communications technologies since the early 1980s.”

Maybe. But where have I seen that 1982 date before? Here’s one place:

That’s from this great piece [warning: contains words like "neoliberal" and "rentier"] on how, “up until 1980 or so, nonfinancial businesses paid out about 40 percent of their profits to shareholders. But in most of the years since 1980, they’ve paid out more than all of them.” Now that by itself wouldn’t explain P&V-J’s results, which are robust for income other than dividends and capital gains. But the ethos driving those payouts might:

The key thing is that at one point, large businesses really were run by people who, while autocratic within the firm and often vicious in defense of their privileges, really did identify with the particular businesses they managed and focused their energy on their survival and growth, and even on the sheer disinterested desire to do their kind of business well. You can find a few businesses that are still run like this … but by far the dominant ethos among managers today is that a business exists only to enrich its shareholders, including, of course, senior managers themselves. Which they have done very successfully, as the graph above (or a look at the world outside) shows.

This is the leftist version. The financial economist (“neoliberal,” if you want) version is that companies got more efficient and scientific, and did a better job of returning capital to their owners rather than leaving it in the hands of wasteful managers. A hybrid version, along with a claim that Mitt Romney is responsible for it and a version of this picture, can be found here, and it conforms nicely with my chronology: Mitt started Bain Capital in 1983. (Others are skeptical of claims that Bain Capital invented private equity, shareholder value, or the economy, but just go with it for a minute.)

If you believe – whatever your political take on it – that in the early 1980s the U.S. shifted from a tradition-driven economy where the working rich managed their firms for plodding stability (and were paid with a fixed and comfortable salary) and the idle rich invested in Treasuries, to a shareholder-value-driven economy where the working rich managed their firms for quarterly earnings target (and were paid with options and incentive comp) and the idle rich invested in hedge funds, then that would explain the rise in volatility: the rich went from being basically creditors on the economy to being shareholders. Equities are more volatile. Mostly. They also, at least in theory, have higher expected returns. Those facts together might help explain why the share of income going to the top 1% went up for the last 30 years, and down for the last 3.

42 comments (hidden to protect delicate sensibilities)
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Comments (42)

  1. Posted by Merritt Parkway | October 26, 2011 at 7:05 PM

    It's good to be in the 1% must work harder.

  2. Posted by InfiniteGuest | October 26, 2011 at 7:07 PM

    This is why we can't have nice things.

  3. Posted by Mexi_Cant | October 26, 2011 at 7:09 PM

    Chart 1
    Mexicant 0

  4. Posted by Occupied Bathroom | October 26, 2011 at 7:22 PM

    The Occupy Wall Street people are nothing more than lazy a-holes who are too lazy to read books and do self improvement on themselves. Those that have money and side with these a-holes will be the first to flee this country when they come knocking on their doors. What is the saying, what's good for them, is not good for me.

    I don't care what CEO's and those in bigger positions make. The more they make the better for them. For me, I strive to make as much money as I can thru my salary at my job, saving, investing and not having any bad debt (ie: credit card debt, car debt and other personal debt). Read the Millionaire Next Door.

    I haven't had a raise in 4 years, but I still manage my money conservatively and I"m thankful I have a job.

    I had student loan debt and it took me a long time to pay it off, but I did it. I also had a lot of credit card debt and I paid that off and will never do that again.

  5. Posted by English please... | October 26, 2011 at 7:30 PM

    I too want to do self improvement on myself

  6. Posted by login | October 26, 2011 at 7:42 PM

    I will admit candidly here that the only years I broke 200K were 06 and 07.

    I had nothing to do with the structured product etc however. ( futures )

    Obviously when I scrutinize these figures I typically look at the 5% bracket which was 156K and change in 07 to gauge whether I had a good year etc.

    Importantly, these data are based on actual submitted AGI on tax returns, not census or other nebulus data, so these are accurate upon possible charges of federal felony.

    i am surprised to see the drawdown at the 1%, but frankly even that level seems a pittance when you think of the people you work amongst every day. It is the very steep rise from there to say the 90,000 or so highest returns that things get interesting.

  7. Posted by trojan_ | October 26, 2011 at 7:49 PM

    +1 for linking W.W.'s post from the Economist – take some notes Matt

  8. Posted by Summation | October 26, 2011 at 7:51 PM

    I particulary like the last paragraph here Mr. Levine. I presume that is your original thinking of course. It presents a sensible theory as to how these trends have arisen.

  9. Posted by deal_mkr | October 26, 2011 at 8:12 PM

    I havnt had this much fun reading Mankiw since soph year in college!!!

  10. Posted by Completely Serious | October 26, 2011 at 8:20 PM

    Matt, are you seriously suggesting that people protesting Wall Street might not have all their facts straight?

  11. Posted by jeff hoffman | October 27, 2011 at 12:43 AM

    That's not the same Greg Mankiw who did such a bang-up job as economic advisor to G.W. Bush? If it is, I'll be sure to read his prognostications and cherry picked historical data for laughs.

  12. Posted by jeff hoffman | October 27, 2011 at 3:20 AM

    I'm rooting for the CEO of your company to take a bigger cut ( What?? He's only taking in 300X his average employee?), so that you can keep that salary streak of yours going; I'd shoot for 10 years! Good luck!

  13. Posted by jeff hoffman | October 27, 2011 at 3:22 AM

    Please get this guy some medication.

  14. Posted by jeff hoffman | October 27, 2011 at 3:46 AM

    You should read his website where he posts such interesting content as pictures of himself and his car before it was wrecked. I think it was an MG or a Pontiac Sunbird. I shed a tear.

  15. Posted by Guest | October 27, 2011 at 9:06 AM

    "it may suck that you lost your job"

    Since when did smoking pot, reading graphic novels, eating hot pockets and playing video games in your parents basement count as a job?

  16. Posted by WCrasher | October 27, 2011 at 9:07 AM

    the graph really puts everything in perspective, nice call

  17. Posted by Avid Reader | October 27, 2011 at 9:10 AM

    Good stuff, Greg! Really.

  18. Posted by Avid Reader | October 27, 2011 at 9:11 AM

    And I'm really, really sorry about the mental slip, Matt. MATT.

  19. Posted by Guest | October 27, 2011 at 9:23 AM

    Cool story, bro.

  20. Posted by Guest | October 27, 2011 at 9:41 AM

    Good writeup. I particularly like the point that the rich shifted from a mostly fixed-income based investments to mostly equity-based investments (in effect). Meanwhile, institutions have become the primary investors in fixed-income. Those two facts explain a lot about the shifts in the market and in patterns of investment over the last two decades.

    It should also be pointed that increasing investments in equities by individuals, particularly those from the upper class, coincided with a sharp jump in technological advances – the two are very likely related, as the hunger for high-yield equities has pushed companies to innovate at a faster rate.

  21. Posted by Observer | October 27, 2011 at 10:40 AM

    graphic novels : comic books :: action figures : dolls

  22. Posted by snarky bastard | October 27, 2011 at 12:52 PM

    Maybe it is a good question to ask why you haev not had a raise in four years… and thankful that you have a job —

    When you get pissed on, do you think it is rain?

  23. Posted by Occupied Bathroom | October 27, 2011 at 12:52 PM

    I didn't mention, that even though I haven't had a raise in 4 years, I have received an annual bonus every year I have been at the company. I know what all of the higher ups in my company make and they make a lot more money than me. I have no jealousy of them and don't care what what they make. It's either be bitter and jealous like you, or, educate/invest in myself, keep investing for the long haul and sharpen my skill set so that I'm marketable to another company or start my own business down the road.

    I'm happy with my job and life and you seem to be jealous and bitter at the way life is treating you. If you desire Socialism/Communism, you have free will to move to those countries where you think you will be taken care of so you don't have to rely on yourself. It's too bad you have so much hatred for people who have risked and have been rewarded, but just remember, the people that take risks often times fail more than they succeed. All it takes is that one time to succeed that makes up for all the failures.

  24. Posted by Angry tipster | October 27, 2011 at 12:52 PM

    Matt you could´ve at least thank me for the tip…

  25. Posted by Finance Addict | October 27, 2011 at 12:54 PM

    The 1% around the world: http://bit.ly/su6mAR

  26. Posted by Occupied Bathroom | October 27, 2011 at 12:59 PM

    Why are you so bitter Jeff? You seem so angry at successful people.

    Cudos to you login on making money in 06 and 07. I'm sure you'll make more in the future.

  27. Posted by Here | October 27, 2011 at 10:55 PM

    You have a pretty nice "don't want to be in last" mentality going on.

    Reminds me of this: http://www.youtube.com/watch?v=UlzaBi_QxPw

  28. Posted by JNCohen | October 28, 2011 at 4:00 PM

    This figure is misleading. The top 1% live off business profits and financial holdings. If you want an accurate view of the top 1%'s wealth, look at how much they have in financial assets. The top 1% is WAY richer than those who earn $343k a year: http://josephncohen.wordpress.com/2011/10/28/how-

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