For 99 percent of Americans, the Obama recovery has been no recovery at all

By James Pethokoukis
March 5, 2012, 2:53 pm

The American:

Liberal economist Emmanuel Saez has updated his much-referenced income inequality research. Here’s how the recovery is going after the Great Recession:

In 2010, average real income per family grew by 2.3%, but the gains were very uneven. Top 1% incomes grew by 11.6% while bottom 99% incomes grew only by 0.2%. Hence, the top 1% captured 93% of the income gains in the first year of recovery. Such an uneven recovery can help explain the recent public demonstrations against inequality. It is likely that this uneven recovery has continued in 2011 as the stock market has continued to recover.

National Accounts statistics show that corporate profits and dividends distributed have grown strongly in 2011 while wage and salary accruals have only grown only modestly. Unemployment and non-employment have remained high in 2011.

This suggests that the Great Recession will only depress top income shares temporarily and will not undo any of the dramatic increase in top income shares that has taken place since the 1970s. Indeed, excluding realized capital gains, the top decile share in 2010 is equal to 46.3%, higher than in 2007.

Looking further ahead, based on the US historical record, falls in income concentration due to economic downturns are temporary unless drastic regulation and tax policy changes are implemented and prevent income concentration from bouncing back. Such policy changes took place after the Great Depression during the New Deal and permanently reduced income concentration until the 1970s.

1. So this isn’t exactly an endorsement of the Obama recovery is it? I mean, for 99 percent of Americans there has been no recovery, according to Saez. In other news, Wall Street paid its employees more than $40 billion in bonuses the past two years.

2. Saez embraces and promotes the back-to-the-1950s nostalgia economics of Obamanomics and modern liberalism: “A number of factors may help explain this increase in inequality, not only underlying technological changes but also the retreat of institutions developed during the New Deal and World War II—such as progressive tax policies, powerful unions, corporate provision of health and retirement benefits, and changing social norms regarding pay inequality.” Indeed, Saez thinks the top marginal tax rate should more than double to 80 percent.

Economist Daren Acemoglu explains the forces driving inequality much differently and more persuasively: “One is that technology has become even more biased towards more skilled, higher earning workers than before. So, all else being equal, that will tend to increase inequality. Secondly, we’ve been going through a phase of globalisation. Things such as trading with China—where low-skill labour is much cheaper—are putting pressure on low wages. Third, and possibly most important, is that the U.S. education system has been failing terribly at some level.”

3. As I have mentioned before, I am dubious of the accuracy of the picture that Saez’s long-term numbers attempt to present.

4. Saez’s analysis seems to suggest that the inequality numbers are going to climb all the way to the sky. Isn’t it more likely that we are approaching some sort of a ceiling, especially given a) rising labor costs in China, b) the rebound in U.S. manufacturing jobs, particularly in the energy sector, and c) the decline in labor force participation?

5. Just what is the right level of inequality? And how much economic growth is Saez willing to sacrifice to get it?

6. Could some of the rise in inequality in recent decades be due to, say, a cultural breakdown in some segments of U.S. society?

7. Let me repeat this bit from a 2008 study on income inequality from the Federal Reserve Bank of St. Louis:

It is important to understand that income inequality is a byproduct of a well-functioning capitalist economy. Individuals’ earnings are directly related to their productivity. Wealthy people are not wealthy because they have more money; it is because they have greater productivity. Different incomes, thus, reflect different productivity levels. The unconstrained opportunity for individuals to create value for society, which is reflected by their income, encourages innovation and entrepreneurship. Economic research has documented a positive correlation between entrepreneurship/innovation and overall economic growth. A wary eye should be cast on policies that aim to shrink the income distribution by redistributing income from the more productive to the less productive simply for the sake of “fairness.” Redistribution of wealth would increase the costs of entrepreneurship and innovation, with the result being lower overall economic growth for everyone. Income inequality should not be vilified, and public policy should encourage people to move up the income distribution and not penalize them for having already done so.