Posts Tagged ‘1 percent’

capital shares

Yesterday, I showed that conventional thinking about factor shares has been finally overturned: they are not necessarily constant, especially within existing economic institutions.

In fact, labor’s shares have been declining for decades now.

The opposite is true of capital’s shares: they’ve been rising for almost three decades.

The profit share of national income has, of course, a cyclical (short-term) component. It falls in the period preceding each recession, and begins to rise again during recessions. That’s how capitalism works.

But the profit share (illustrated by the blue line in the chart above, measured on the left side) also exhibits secular (longer-term) movements—and, since 1986 (when it reached a low of 7 percent), it more than doubled (to a peak of 15.4 percent in 2006) and remains still very high (at 13.6 percent in 2016).

Over that same period, the share of income captured by individuals at the top—the top 10 percent and, a smaller group, the top 1 percent (in the red and green lines, respectively, measured on the right)—who receive distributions of the surplus, also increased dramatically. The share of income of the top 10 percent rose by 29.7 percent (from 36.4 to 47.2 percent of total factor income) and of the top 1 percent by even more, 40.2 percent (from 25.4 to 35.6 percent).

To expand the conclusion I reached yesterday: under existing economic institutions, factor shares do in fact change—and they’ve been turning against labor (beginning in the mid-1970s) and in favor of capital (since the mid-198os) for decades now.

That’s a fundamental change in the class nature of the U.S. economy that needs to be reflected in economists’ theoretical models—which also needs to be corrected in reality, by radically transforming existing economic institutions.

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Apparently, Richard Reeves is worried that the top echelons of the U.S. middle class—those earning over $120,000—are separating from the rest of the country, and pulling up the drawbridge behind them.

“The upper middle class families have become greenhouses for the cultivation of human capital. Children raised in them are on a different track to ordinary Americans, right from the very beginning,” he writes.

The upper middle class are “opportunity hoarding” – making it harder for others less economically privileged to rise to the top; a situation that Reeves says places stress on the efficiency of the US economic system and creates dynastic wealth and privilege of the kind the nation’s fathers sought to avoid.

That makes sense. The fact is, class mobility has been declining in the United States. The lack of movement up and down the economic ladder, which itself is a product of growing inequality, serves to magnify the obscene levels of inequality in the United States.

The two longstanding myths about U.S. economic and social structures—that classes don’t exist and, even if they do, there is plenty of movement between them—have been shattered in recent years.

But Reeves needs to take another look at what’s going on. First, it’s not an either-or issue—the top 1 percent or the top 20 percent. Both groups are pulling away from the bottom 90 percent.

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The share of income going to the top 10 percent (since I don’t have data on the top 20 percent) has soared over the course of the past four decades from 34 percent to 47 percent. Meanwhile, the share going to the bottom 90 percent has fallen precipitously, from 66 percent to 53 percent.

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The members of the top 1 percent have also pulled away from those at the bottom, since their share of income has grown during the same period from 11 percent to 20 percent.

Both groups—the top 10 percent and the top 1 percent—are pulling away from and leaving everyone else behind.

But there’s also a difference between them, which Reeve also misses. Whereas those at the very top are responsible—via their membership in boards of directors of large corporations as well as their role in sole proprietorships, partnerships, LLCs, and other business forms—for appropriating the surplus, the rest of the top group tend to get a cut of the surplus. In other words, the remaining members of the top 10 (or, for Reeves, 20) percent share in the booty that is extracted from everyone else.

The fact that those at the top are pulling away from everyone else is not just a matter of “legacy” students gaining admittance to top universities or well-placed internships. It’s also about the surplus they manage to capture, both directly and indirectly. That’s what distinguishes them from the 90 percent, who produce but do not share in the surplus—or, for that matter, have any say in what happens to the surplus.

Reeves’s major concern is to celebrate and restore the idea of meritocracy. I get that. The question he doesn’t pose, however, is: where’s the merit in excluding those in the bottom 90 percent from having a say in how much surplus there will be and what to do with it once it’s produced?

The fact is, the organization of U.S. economic and social institutions means that those at the top, whoever they are and however much they might change, are in a position to capture and do what they want with the surplus everyone else creates.

That’s why the current system is “rigged” and those at the top are pulling away from the vast majority at the bottom.

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Special mention

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What happens when you combine conspicuous consumption and consumption productivity?

You get Barracuda Straight Leg Jeans—complete with “crackled, caked-on muddy coating”—on sale for $425 at Nordstrom.

When Thorstein Veblen invented the term “conspicuous consumption,” in his Theory of the Leisure Class (pdf), he was referring to late-nineteenth-century America as having entered the “predatory phase” of culture, when the people at the top obtained their goods by seizure and imputed indignity to the “performance of productive work.”

The clothing of the leisure class reflected this distancing from the world of work—conspicuous consumption combined with conspicuous leisure and conspicuous waste.

In dress construction this norm works out in the shape of divers contrivances going to show that the wearer does not and, as far as it may conveniently be shown, can not engage in productive labor. Beyond these two principles there is a third of scarcely less constraining force, which will occur to any one who reflects at all on the subject. Dress must not only be conspicuously expensive and inconvenient, it must at the same time be up to date.

Nordstrom’s muddy jeans are therefore a perfect example of contemporary predatory culture, when those at the top are afforded the luxury of ironically quoting—but not actually doing—any productive work. Instead, they capture a portion of the surplus and use it to purchase clothing that—in the form of conspicuous consumption, leisure, and waste—shows they are exempted from the exigency of work imposed on everyone else, who are of course required to dress in neat and clean uniforms, just like the servants of the first Gilded Age.

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Now, in the latest stage of predatory culture, those at the top can purchase fake mud-stained jeans while McDonald’s employees will now wear uniforms reminiscent of the Hunger Games.

What’s next, corsets?*

 

*Here again is Veblen:

The dress of women goes even farther than that of men in the way of demonstrating the wearer’s abstinence from productive employment. . .

the woman’s apparel not only goes beyond that of the modern man in the degree in which it argues exemption from labor; it also adds a peculiar and highly characteristic feature which differs in kind from anything habitually practiced by the men. This feature is the class of contrivances of which the corset is the typical example. The corset is, in economic theory, substantially a mutilation, undergone for the purpose of lowering the subject’s vitality and rendering her permanently and obviously unfit for work.

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First, it was conspicuous consumption. Then, it was conspicuous philanthropy. Now, apparently, it’s conspicuous productivity.

According to Ben Tarnoff,

the acquisition of insanely expensive commodities isn’t the only way that modern elites project power. More recently, another form of status display has emerged. In the new Gilded Age, identifying oneself as a member of the ruling class doesn’t just require conspicuous consumption. It requires conspicuous production.

If conspicuous consumption involves the worship of luxury, conspicuous production involves the worship of labor. It isn’t about how much you spend. It’s about how hard you work.

And that makes a lot of sense, for at least two reasons. First, CEO salaries in the United States continue to be much higher than average workers’ pay—276 times as much in 2015. CEOs need to publicize the long hours they work in order to attempt to justify the large gap between what they take home and what they pay their workers. As Tarnoff explains, “In an era of extreme inequality, elites need to demonstrate to themselves and others that they deserve to own orders of magnitude more wealth than everyone else.”

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The problem, of course, is many American workers are working long hours these days. According to the Bureau of Labor Statistics, in 2015, employed persons ages 25 to 54, who lived in households with children under 18, spent an average of 8.8 hours working or in work-related activities and the rest sleeping (7.8 hours), doing leisure and sports activities (2.6 hours), and caring for others, including children (1.2 hours ).

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And, on a weekly basis (taking into account public holidays, annual leaves, and so on), U.S. workers put in almost 25 percent more hours—or about an hour more per workday—than Europeans.

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The other reason why conspicuous productivity matters is because, in comparison to the First Gilded Age (when Thorstein Veblen first invented the term conspicuous consumption), a larger share of the surplus captured by the top 1 percent takes the form of labor income during the Second Gilded Age. They get—and deserve—that large and growing share because they work long hours.

The problem, of course, as I showed the other day, that composition of income has changed since 2000. Since then, the capital share of their income has bounced back. Thus, the “working rich” of the late-twentieth century are increasingly living off their capital income, or are in the process of being replaced by their offspring who are living off their inheritances.

This was my conclusion:

It looks then as if those at the top have either turned into or been replaced by rentiers, thus joining the existing owners of capital at the very top—thereby mirroring, after a short interruption, the structure of inequality last seen during the first Gilded Age.

That’s perhaps why conspicuous productivity was invented. Increasingly, those at the top are able to capture a large share of the surplus not because they do, but because they own. But if they can hide that by boasting about the long hours they work, they can attempt to defend their class power.

Or so they hope. . .

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Skellington is right: in my post on Tuesday, I did not separate out people at the very top from the rest of those at the top. That’s because, in the data I presented, those in the top 0.1 percent were included in the top 1 percent.

Unfortunately, I don’t have the same kind of breakdown in the composition of incomes as I used in those charts. What I do have are data on the shares of income and wealth for the top 0.1 percent versus the remainder of the top 1 percent (so, top 1 percent to but not including the top 0. 1 percent).

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Clearly, income within the top 1 percent is unequally distributed—and has gotten more unequal over time. While the top 0.1 percent (approximately 326.5 thousand individuals) captured about 9.3 of pre-tax income in 2014 (up from 3.9 percent in 1979), the remainder of the top 1 percent (and thus about 2.9 million individuals) took home about 10.9 percent of pre-tax income in 2014 (up from 7.3 percent in 1979). Over time (from 1979 to 2014), the top 0.1 percent has increased its share of the income going to the top 1 percent from a bit more than a third (35 percent) to almost half (46 percent).

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The distribution of wealth within the top 1 percent is even more unequally distributed than the distribution of income—and it, too, has become more unequal over time. While the top 0.1 percent owned about 19.1 percent of total household wealth in 2014 (up from 7.2 percent in 1979), the remainder of the top 1 percent owned about 18. 2 percent of household wealth in 2014 (up from 15.2 percent in 1979). Thus, over time, the top 0.1 percent has increased its share of household wealth owned by the top 1 percent from about one third (32 percent) to over half (51.3 percent).

The conclusions, then, are straightforward: For decades now, those at the top have managed to pull away—in terms of both income and wealth—from everyone else in the United States. And, by the same token, those at the very top have been distancing themselves from everyone else at the top.

No matter how much they do battle over their respective shares, the one thing that ties together those at the top and those at the very top is that their income and accumulated wealth derive from the surplus created by the bottom 90 percent.

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Who’s running away with the surplus, those at the top or those at the very top?

In a new study on “income inequality in the 21st century,” Fatih Guvenen and Greg Kaplan note that recent increases in inequality in the United States need to be understood in terms of trends of and, especially, within the top 1 percent. That’s particularly true when, instead of using Social Security data (which capture labor income), they turn to Internal Revenue data (which capture all forms of income).

While I agree with Guvenen and Kaplan that historically there have been significant differences between the incomes of the top 1 percent and the top 0.1 percent—those at the top and those at the very top—in my view, they tend to exaggerate the differences and lose sight of the fact that the two groups have become one.

Clearly, as can be seen in the chart above (based on data from Thomas Piketty, Emmanuel Saez, and Gabriel Zucman), the average income of those in the top tenth of one percent has risen much more than that of the top one percent. From 1979 to 2014, the average income of those at the very top has risen 277 percent compared to an increase of 183 percent for those at the top. But, of course, the average incomes of both groups have soared compared to that of the bottom 90 percent, which has increased only 27 percent over the same period.

And while they’re right, the rise in capital income much more than labor income helps explain the rising share of income of those at the very top, especially in recent decades, the fact is both groups—whether in the form of labor or capital income—have managed to capture a rising share of the surplus.

Where do those incomes come from?

The following two charts illustrate the composition of incomes of the top 1 percent and top 0.1 percent, respectively.

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One way of making sense of the way those at the top and those at the very top manage to capture a portion of the surplus is by distinguishing between a labor component (in various shades of blue in both charts) and a capital component (in shades of green). When added together, the two components represent the total share of national income that goes to the top 1 percent (which rose from 11.1 to 20.2 percent) and the top 0.1 percent (which rose from 3.9 to 9.3 percent) between 1979 and 2014.

The labor component comprises two categories: employee compensation (e.g., payments to CEOs and executives in finance) and the labor part of noncorporate business profits (e.g, partnerships and sole proprietorships). Capital income can be similarly decomposed into various categories: interest paid to pension and insurance funds, net interest, corporate profits, noncorporate profits, and housing rents (net of mortgages).

As can be seen in the top chart above, by 2014 the top 1 percent derived over half of their incomes from capital-related sources. In earlier decades, from the late-1970s to the late-1990s, a much larger share of their income came from labor sources. They were the so-called “working rich.” This process culminated in 2000 when the capital share in top 1 percent incomes reached a low point of 49.4 percent. Since then, however, it has bounced back—to 58.6 percent in 2014. Thus, the “working rich” of the late-twentieth century are increasingly living off their capital income, or are in the process of being replaced by their offspring who are living off their inheritances.

Much the same trend, in an even exaggerated fashion, is true of those at the very top, the top 0.1% (in the lower chart). More than half of their income has always come from capital-related sources. They were never the “working rich”; they were always for the most part “coupon clippers.” The share of their income from capital-related sources was already 60 percent in 1979 and continued to grow (to 63 percent) by 2014.

What this means, in general terms, is the growth of inequality over decades is due to the ability of those at the top and those at the very top to capture a large portion of the growing surplus. But there has also been a change in the nature of that inequality in recent years, at least for those at the top—which is not due to escalating wage inequality, but to a boom in income from the ownership of stocks and bonds. They’ve now joined the ranks of the “coupon clippers,” who are able to use their accumulated wealth to get their share of the surplus.

It looks then as if those at the top have either turned into or been replaced by rentiers, thus joining the existing owners of capital at the very top—thereby mirroring, after a short interruption, the structure of inequality last seen during the first Gilded Age.