Monday, March 28, 2016

Why the 1% earn so much and what to do about it

If they have high IQ, they are using it to cheat and defraud. Eg., they produce products that malfunction after a short time, or don't work right from the beginning, resulting in our having to replace the products, thus enriching the executives. They make excessive buys & sells of people's retirement investments in order to generate large fees for themselves. Pharmaceutical companies pay companies that make generic drugs not to produce competing generics, in order for the first company to be able to continue to charge high prices. They skimp on safety measure causing injuries and deaths to their workers, give themselves huge bonuses, then file bankruptcy so they don't have to pay for their actions. Intelligence on behalf of psychopathic actions does not contribute to society in a positive way.

The author makes some good points, but appears to slant his arguments from a dedication to the belief that competition will solve all problems, and all bad comes from government regulation. Considering his slanted presentation on things I already know about, I am skeptical of his claims that there has not been much change in the share of national GDP going to various sectors.

Jonathan Rothwell | March 25, 2016

The spectacular economic rise of the top 1 percent is now common knowledge, thanks in large part to the work of Thomas Piketty and his collaborators. The top 1 percent of U.S. residents now earn 21 percent of total national income, up from 10 percent in 1979.

Curbing this inequality requires a clear understanding of its causes. Three of the standard explanations—capital shares, skills, and technology—are myths. The real cause of elite inequality is the lack of open access and market competition in elite investment and labor markets. To bring the elite down to size, we need to make them compete.

Myth 1: Capital vs. labor share

In his recent and otherwise valuable book, Saving Capitalism: For the Many, not the Few, Robert Reich claims that the share of income going to workers has fallen from 50 percent in 1960 to 42 percent in 2012. Meanwhile, corporate profits have risen. In short: trillions of dollars have gone to capitalists instead of workers. The sensible policy responses, as Reich and others have stressed, are to increase taxes on corporate income and capital gains, and widen capital ownership.


So, what’s going on here? The simple explanation is that wages and salaries are an inadequate measure of the share of economic benefits flowing to labor. Wages and salaries have declined as a share of total income, largely for two reasons. First, total national income includes government transfer payments, which are rising because of an aging population (e.g., Social Security and Medicare). Second, companies have greatly increased non-salary compensation (e.g., healthcare and retirement benefits). Total worker compensation plus transfer payments have actually slightly increased as a share of total national income, from 79 percent between 1951 and 1979, to 81 percent for the years from 1980 to 2015:

Wage earners are not helped by Social Security and Medicare going to the elderly, except in some cases where they might otherwise have to provide financial help to their aging parents. It might help some have a larger inheritance eventually, but that doesn't pay the bills today.

He ignores rising cost of higher education, at least part of which is due to DECREASING government support.

Myth 2: Super skills lead to super riches

In his “defense of the one percent,” economist Greg Mankiw argues that elite earnings are based on their higher levels of IQ, skills, and valuable contributions to the economy. The globally-integrated, technologically-powered economy has shifted so that very highly-talented people can generate very high incomes.

It is certainly true that rising relative returns to education have driven up inequality. But as I have written earlier, this is true among the bottom 99 percent. There is no evidence to support the idea that the top 1 percent consists mostly of people of “exceptional talent.” In fact, there is quite a bit of evidence to the contrary.

Drawing on state administrative records for millions of individual Americans and their employers from 1990 to 2011, John Abowd and co-authors have estimated how far individual skills influence earnings in particular industries. They find that people working in the securities industry (which includes investment banks and hedge funds) earn 26 percent more, regardless of skill. Those working in legal services get a 23 percent pay raise. These are among the two industries with the highest levels of “gratuitous pay”—pay in excess of skill (or “rents” in the economics literature). At the other end of the spectrum, people working in eating and drinking establishments earn 40 percent below their skill level.

Using data from an OECD cognitive test of thousands of Americans and adults from around the world (the PIACC), I find that workers in the financial and insurance sector get a pay bump equivalent to a decile of the earnings distribution (e.g., pushing them up from the 80th to 90th percentile). This is the largest premium aside from the quasi-monopolistic mining and utilities sectors:

At the occupational level, CEOs are paid 1.5 deciles above their “IQ.” Health professionals also receive a very large boost in earnings.

Using microdata from the Census Bureau, I find that the “gratuitous pay” premium in certain industries has increased dramatically since 1980. Workers in securities and investment saw their excess pay rise from 41 percent to 60 percent between 1980 and 2013. Legal services went from 27 percent to 37 percent. Hospitals went from 21 percent to 39 percent. Meanwhile, those working in eating and drinking establishments consistently hovered around negative 20 percent:


where are the 1 percent working? Top answer: doctor’s offices. No industry has more top earners than physicians’ offices, with 7.2 percent. Hospitals are home to 7 percent. Legal services and securities and financial investments industries account for another 7 and 6 percent, respectively. Real estate, dentistry, and banking provide a large number, too:

Computer systems design is the only tech sector among the top contributors. There are five times as many top 1 percent workers in dental services as in software services.

CEOs are of course more likely to be in the top tier, especially if they are in certain privileged industries: 28 percent of CEOs from the financial sector, for instance, and 26 percent of those in hospitals. (But 15 percent of college presidents are in the top 1 percent, too.)

He mentions CEO's then ignores factors leading to their excessive pay, which is due to the fact that they set each others salaries by serving on each others boards.


As economist Dean Baker points out, politicians and intellectuals often champion market competition—but what they mean by that is competition among low-paid service workers, production workers, or computer programmers who face competition from trade and immigration, while elite professionals sit behind a protectionist wall. Workers in occupations with no higher educational requirements see their wages held down by millions of other Americans denied a high-quality education and competing for relatively precious vacancies.

For lawyers, doctors, and dentists— three of the most over-represented occupations in the top 1 percent—state-level lobbying from professional associations has blocked efforts to expand the supply of qualified workers who could do many of the “professional” job tasks for less pay. Here are three illustrations:

I have read that there is actually a surplus of lawyers, leading to many not being able to get jobs in their field when they graduate.


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