Then versus Now: Or, why all the inequality?

Via, via, via. Click to embiggen, commentary below.

A few things are driving this.

  1. The entrance of South East Asia, then China, then India into the global division of labour and the global market for consumer goods and services. This pushed up returns for the wealthy who could hirer cheaper and sell more widely and pushed down returns to labour as workers had to compete with their ever poorer neighbours (although many goods were cheaper and inflation lower).
  2. A decline in innovation, a la Tyler Cowen. We became much better at doing things from the 1920s-1970s. Most of the modern world was created then and we haven’t created anything like a big a breakthrough as kidney dialysis, chemotherapy, the airplane, TV, refrigerators, air-conditioning, etc., in the last 30 years. The internet is nice, but not a huge boon to GDP.
  3. Some combination of declining returns in the real economy and rent-seeking in the financial sector has caused a shift from real production to finance. With attendant crises and diminished growth. As it became harder to profit from real production capital fled to finance. As finance became more dominant it became more difficult to profit from real production, a vicious cycle.
  4. The above graph looks at US incomes and so overstates the divergence. Policy may be set in the main at the national level but production occurs globally. Many people worse off than those living in the US have become significantly better off. The deceleration from the 1980s in the west is mirrored by an acceleration in the rest of the world. Little comfort to some, great comfort to others.
  5. Policy in the west erred in two ways:
    1. It sought to trade equality for more growth. Taxes were reduced on the wealthy to incentivise them to innovate more. Unfortunately the incentive effects of tax cuts on the wealthy are weak, especially compared to how much more difficult it became to innovate (see 2) or produce profitable non-financial firms (see 3).
    2. Secondly, the decline of trade unionism didn’t just make workers more “flexible”. It also caused a decline in worker “voice” in the workplace. Compensating for this, and I would argue provoked by this, there was an increase in occupational licensing (from baby-sitter to lawyers) and centralised directives to protect workers. Where workers could have once demanded whatever protection was deemed necessary with union backing, they now had a significantly weaker on site negotiating position. Workplaces became more intimidating for workers, and more regulated for employers.

UPDATE: Read Noahpinion (do it, it is excellent) for an expansion and deepening of the argument I make in point 1.

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9 thoughts on “Then versus Now: Or, why all the inequality?

  1. Just a couple of things.

    The first set of numbers. They are measuring pay, not compensation. And as we know, health care insurance is part of compensation not pay. And as we also know, health care insurance has been getting ever more expensive…..and rising as a percentage of total compensation.

    Adjust pay for compensation and the failure of compensation to track productivity lragely disappears.

    The percentage of income going to the top %. The bit they’ve missed, and it’s a crucial part, is that in 1928 it was all (OK, mostly) returns to capital. Now it’s almost all returns to human capital, ie labour income.

    You really shouldn’t be comparing the two in this manner.

    1. The first set of numbers draws three lines, Productivity, Average Hourly Compensation and Average Hourly Wage.

      Secondly, I am aware that more of the very rich are wage earners than (ever?) before. But a large number of these work in finance (see point 3) and it isn’t really accurate to say their renumiration is simply the return to their human capital.

      A degree is rent, extracted from shareowners (some of which is the implicit subsidy large banks enjoy, I recommend Andy Haldane on the matter.), another part is network capital, these people are nodes for investment decisions. It is why gardening leave is so common. These people don’t possess great human capital, but the relations they have with others represent great wealthy.

  2. Went and looked at the NYT directly……still didn’t see it though.

    As I stoutly maintain (and have done ever since an ex- dragged me around art galleries) I don’t really do visuals……

  3. Really? Oh I’m signed up with the whole “information is beautiful” thing. I’m terrible at makign visual representations of data (or anything, come to think about it) but I appreciate it. I wish I were better at pouring through tables, but I’m not.

    You’re in a distinct minority, normally much easier to inform or convince people with visual cues.

  4. I know, I agree I’m the odd one out. Graphs, those damn ISLM things, bar charts, paintings, photos, to a very large extent films, certainly architecture, fashion, colour coordination (not entirely for that one) closed books to me.

    Just don’t get what people are talking about most of the time.

    “Isn’t that a beautifully composed painting/picture?”

    “Eh? It’s a tree”

    “Yes, but see the way your eye is drawn to this” blah blah

    “Err, no?”.

    The Impressionists just needed a better spectacles prescription and Mondrian et all…..did they never manage to leave the studio without knocking over the paint cans? And what’s with Rembrandt’s thing for fat birds?

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