Is All Income Inequality Created Equal?

Emmanuel Saez of UC Berkley has recently updated figures for income statistics with 2012 numbers. The damning quote: "Top 1% incomes grew by 31.4% while bottom 99% incomes grew only by 0.4% from 2009 to 2012. Hence, the top 1% captured 95% of the income gains in the first three years of the recovery." Commentary has been interesting. On Twitter, Justin Wolfers caps off a quick overview with this: "If you thought the Great Recession would tame inequality, think again. The top 1% share is back near record levels."

 We here at EE have written about inequality before, and typically in the context of income inequality specifically, rather than wealth inequality. Buchanan would have rapped our knuckles if he'd have caught us. But before we go cut ourselves any switches, let me defend our approach. At least the way I see it, the EE project aims to peer into and categorize the commonplace moral approaches folks have towards the grand world of commerce. And the simple truth is that if you stop most folks on the street (and even well-educated folks with advanced degrees!), they'll tell you that money is money, be it pocket currency, income, wealth or OTC options. I have literally heard with my own two wrinkly ears business school professors conflate income with wealth. So is it worth thinking about income inequality to the exclusion of wealth inequality or timeline inequality or longevity inequality? To the extent that our focus reflects on pedestrian claims of fairness and justice, I'm willing to write us a hall pass.

With that said, let's think a little bit about the Saez report. As you might predict, my first reaction was a spot of frustration. It matters very much indeed what generates an increasingly large Gini coefficient. If we're talking about rents and special privileges granted by government fiat, fat paychecks to greasy fatcats with offices on K Street violate the very spirit of antitrust (collusion in restraint of trade) and are both unjust and unfair, as much to the academic economist as to the irate citizen or bloviating pundit. If, contrariwise, concentrated wealth is a matter of summing the returns to an increasing pile of modest, euvoluntary transactions, it becomes more difficult to claim that the outcome is unjust, even if it appears ex post to be unfair. More difficult, but not impossible.

So my priors are that yes, we've got plenty of the salacious rent-seeking/preservation action happening between Washington and Wall Street, but haven't there also been great advances in the hidden side of truck, barter, and exchange? Hasn't dynamic inventory management spread from sea to shining sea? Don't we have gigantic economies of scale now that we've got billions of people sharing network space? And don't we have this cohort issue where we expect newer workers to earn entry wages as more experienced workers move up into higher deciles, thereby skewing the moral intuitions of our feelings on this stuff? These are the thoughts I've picked up listening to Russ and Mike chew these topics on Econtalk. This is the marrow of my micro courses, of the bits and bobs I've collected studying Alchian and Allen, Friedman and Schwartz, Buchanan and Tullock, Hinich and Munger. These are also the priors I can't quite completely maintain in the face of the the first quote up there in the opening paragraph.

One thing I know for sure is that to get a good update on my priors, I'd want to take a good solid look at how the breakdown looks across industries. If we're seeing very different results in aerospace than in, say, cinder block production, we can say a lot more about the relative importance of political rents. As it is, my gut (a notably useless part of the body for rigorous analytical thinking) tells me that there's no f-ing way that these large numbers can be picked up by either technological advance or rent-seeking alone. This would seem to require a combination assault, where rising stars in the business world would have to both a) improve the delivery of their product and b) successfully lobby for the protection of their business model. At the same time, we'd need to see some decline in LFP among new entrants (more here). These combined efforts might produce these results. Might.

So where's the baby among all this bathwater? Good delivery of product sure sounds nice to me. The rest? Not so much. But Andrea's Question once again pokes its rough nose through the fabric of all my posturing. Yes, we want to get rid of rent-seeking, but what are you going to do about it, Sam? Propose a constitutional amendment? You've got this post series on the Constitution, after all. Well, sure I do. I can even think of what the language would be like. I'd return to something closer to an original interpretation of the Commerce Clause. But much like hitching your Conestoga wagon up to a team of unicorns, I have a hunch that the actual, real life bargaining set is null. Even very modest threats to the rent-preservation societies of America reveals a savage and fierce protection of political privilege. The accumulated rents of elites is gargantuan and even if it's in everybody's interests to eliminate them, coordination failures pretty much guarantee it won't happen. Coase was right.

And I'm afraid I can't hand you a decent second-best proposal. tax-and-transfer schemes are less than useless since the folks who have all the rents will be the ones to best avoid the schemes. Political solutions empower the folks who control the legislature. Duh.

Well, at least they're still making neat toys for us. I hear the new iPhone comes in candy-coated colors! Biometric scanning included gratis.