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Being In The Top 1% Is Both More And Less Awesome Than It Used To Be

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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.


So Maybe Greek CDS Will Be More Than Fine?

Gaaaaaaaaaaaaaaaah Greece. Okay so all systems appear to be go on the Greek debt exchange, which means its time to decide What This Means, and, I just. Really. Greece. Come on. All I want is to talk about 13D reporting requirements, and now I have to pay attention to Portugal? No. Just no.* Still here is arguably a fun factoid: On Wednesday, Swiss bank UBS AG started quoting a "gray market" in new Greek sovereign bonds ... using as a guide details of the debt swap Greece has put on the table for private investors to accept until Thursday evening. The "bid" price for a batch of future Greek bonds due in 2042, or the highest price the dealer was willing to pay, was around 15 cents on the dollar; the "offer" price, or the most the dealer was willing to sell at, was 17 cents on the dollar, the first person said. ... The prices quoted by UBS imply that losses private creditors to Greece will take are more like 79% of face value, not the original haircut of 70-75% many had expected. Yeah but. If you believe this horrible CDS mechanics stuff that various people including me have been yammering about for weeks - here is the best explanation - that means that if for some reason you had the foresight to be long Greek bonds and hold CDS against them you'd end up with a package worth (1) 21 on the bonds and (2) 83 on the CDS (assuming that the 17 offer for the 2042 bonds represents a real price for the cheapest-to-deliver new bond in the Greek auction) for (3) 104 total which is (4) more than par, so you win this particular game, yay. Which you were at risk of losing - a week ago one of our fearless commenters spotted the longest new bonds at 25ish vs. 24ish for the old-bond-y package, for a total of 99 for the hedged holder - losing 1 point versus par.**