Macro Roundup

Ezekiel Dixon-Roman, Howard Everson and John McArdle, “Race, Poverty and SAT Scores: Modeling the Influences of Family Income on Black and White High School Students’ SAT Performance,” University of Pennsylvania, January 2013, https://www.researchgate.net/publication/280232788_Race_Poverty_and_SAT_Scores_Modeling_the_Influences_of_Family_Income_on_Black_and_White_High_School_Students'_SAT_Performance

Ed, she cites the 20% to a CBO lit review she did (Attached, see page 27), which in turn relies on a 2015 (also by her) that finds rents are closer to 10%.

"...A widely cited study by Gentry and Hubbard estimated that 60% of corporate profits represented earnings in excess of a risk-free return.Since some (perhaps most) of the excess return is a risk premiums and is part of the opportunity cost of capital (not excess profit), the excess profit share should be lower. Some evidence suggests that it is in the neighborhood of 10% to 20%....Moreover, the burden relates only to those firms that both have some excess profits and engage in bargaining. While bargaining may be common in some European countries, in the United States, where unions would be expected to do the bargaining, less than 7% of private wage and salary workers are covered by unions..."

Jennifer Gravelle, "Corporate Tax Incidence with Excess Profits," Government Accountability Office, 2015, https://www.ntanet.org/wp-content/uploads/proceedings/2015/160-gravelle-corporate-tax-incidence-effect.pdf

"....Most analysis of corporate tax incidence assumes that incidence will fall only on all owners of capital labor in the long run. In short run, corporate shareholders will bear the burden, until forces of supply and demand push the burden to the factors of production—capital via the return to owners and labor through wages. However, the presence of excess profits—those above the normal return on investment—in the long run could result in some share falling on corporate shareholders in the long run as well.Recently the Department of the Treasury adjusted their incidence assumptions to assume that 60 percent of profits are supra normal and thus that share of the burden falls on corporate shareholders, while the remaining 40 percent is split evenly between all owners of capital and labor. They based their assumption on two sources of estimates of excess profits. This paper provides new estimates of the share of profits that may be attributed to excess profits and that would therefore fall on corporate shareholders. The methodology uses data on intangible assets to allocate profits to investment sources and isolate potential excess profits. This study finds that estimates range widely according to data and specifications, but suggests that the share of corporate profits that are supra normal is modest and likely less than 20 percent...it is more likely that the share of profits that are excess or supranormal is much less, closer to 10 percent....."

Jane Gravelle, "Corporate Tax Reform: Issues for Congress," Congressional Budget Office, September 22, 2017,

"...here is a third alternative: back to “Finland Station,” with all the lessons of the past. This time, people get to vote. Well, debate and deliberate and then vote — and have faith that people can organize together to chart new destinations for humanity. Stripped down to its essence, and returned to its roots, socialism is an ideology of radical democracy. In an era when liberties are under attack, it seeks to empower civil society to allow participation in the decisions that affect our lives. A huge state bureaucracy, of course, can be just as alienating and undemocratic as corporate boardrooms, so we need to think hard about the new forms that social ownership could take. Some broad outlines should already be clear: Worker-owned cooperatives, still competing in a regulated market; government services coordinated with the aid of citizen planning; and the provision of the basics necessary to live a good life (education, housing and health care) guaranteed as social rights. In other words, a world where people have the freedom to reach their potentials, whatever the circumstances of their birth. We can get to this Finland Station only with the support of a majority; that’s one reason that socialists are such energetic advocates of democracy and pluralism. But we can’t ignore socialism’s loss of innocence over the past century. We may reject the version of Lenin and the Bolsheviks as crazed demons and choose to see them as well-intentioned people trying to build a better world out of a crisis, but we must work out how to avoid their failures. That project entails a return to social democracy. Not the social democracy of François Hollande, but that of the early days of the Second International. This social democracy would involve a commitment to a free civil society, especially for oppositional voices; the need for institutional checks and balances on power; and a vision of a transition to socialism that does not require a “year zero” break with the present. Our 21st-century Finland Station won’t be a paradise. You might feel heartbreak and misery there. But it will be a place that allows so many now crushed by inequity to participate in the creation of a new world...."
Bhaskar Sunkara, "Socialism’s Future May Be Its Past,"New York Times, June 26, 2017, https://www.nytimes.com/2017/06/26/opinion/finland-station-communism-socialism.html

Socialism’s Future May Be Its Past

One hundred years after Lenin’s sealed train arrived at Finland Station and set into motion the events that led to Stalin’s gulags, the idea that we should return to this history for inspiration might sound absurd. But there was good reason that the Bolsheviks once called themselves “social democrats.” They were part of a broad movement of growing parties that aimed to fight for greater political democracy and, using the wealth and the new working class created by capitalism, extend democratic rights into the social and economic spheres, which no capitalist would permit.

The early Communist movement never rejected this broad premise. It was born out of a sense of betrayal by the more moderate left-wing parties of the Second International, the alliance of socialist and labor parties from 20 countries that formed in Paris in 1889. Across Europe, party after party did the unthinkable, abandoned their pledges to working-class solidarity for all nations, and backed their respective governments in World War I. Those that remained loyal to the old ideas called themselves Communists to distance themselves from the socialists who had abetted a slaughter that claimed 16 million lives. (Amid the carnage, the Second International itself fell apart in 1916.)

Of course, the Communists’ noble gambit to stop the war and blaze a humane path to modernity in backward Russia ended up seemingly affirming the Burkean notion that any attempt to upturn an unjust order would end up only creating another.

Most socialists have been chastened by the lessons of 20th-century Communism. Today, many who would have cheered on the October Revolution have less confidence about the prospects for radically transforming the world in a single generation. They put an emphasis instead on political pluralism, dissent and diversity.

Still, the specter of socialism evokes fear of a new totalitarianism. A recent Victims of Communism Memorial Foundation report worries that young people are likely to view socialism favorably and that a “Bernie Sanders bounce” may be contributing to a millennial turn against capitalism. Last year, the president of the United States Chamber of Commerce, Thomas J. Donohue, even found it necessary to remind readers that “Socialism Is a Dangerous Path for America.”

The right still denounces socialism as an economic system that will lead to misery and privation, but with less emphasis on the political authoritarianism that often went hand in hand with socialism in power. This may be because elites today do not have democratic rights at the forefront of their minds — perhaps because they know that the societies they run are hard to justify on those terms.

Capitalism is an economic system: a way of organizing production for the market through private ownership and the profit motive. To the extent that it has permitted democracy, it has been with extreme reluctance. That’s why early workers’ movements like Britain’s Chartists in the early 19th century organized, first and foremost, for democratic rights. Capitalist and socialist leaders alike believed that the struggle for universal suffrage would encourage workers to use their votes in the political sphere to demand an economic order that put them in control.

It didn’t quite work out that way. Across the West, workers came to accept a sort of class compromise. Private enterprise would be tamed, not overcome, and a greater share of a growing pie would go to providing universal benefits through generous welfare states. Political rights would be enshrined, too, as capitalism evolved and adapted such that a democratic civil society and an authoritarian economic system made an unlikely, but seemingly successful, pairing.

In 2017, that arrangement is long dead. With working-class movements dormant, capital has run amok, charting a destructive course without even the promise of sustained growth. The anger that led to the election of Donald Trump in the United States and the Brexit vote in Britain is palpable. People feel as if they’re on a runaway train to an unknown destination and, for good reason, want back to familiar miseries.

Amid this turmoil, some fear a return to Finland Station via the avuncular shrugs of avowedly socialist leaders like Mr. Sanders and Jean-Luc Mélenchon in France. But the threat to democracy today is coming from the right, not the left. Politics seems to present two ways forward, both decidedly non-Stalinist forms of authoritarian collectivism.

“Singapore Station” is the unacknowledged destination of the neoliberal center’s train. It’s a place where people in all their creeds and colors are respected — so long as they know their place. After all, people are crass and irrational, incapable of governing. Leave running Singapore Station to the experts.

This is a workable vision for elites who look at the rise of an erratic right-wing populism with justified fear. Many of them argue the need for austerity measures to maintain a fragile global economy, and worry that voters won’t take their short-term pain to spare themselves long-term dysfunction. The same goes for the looming threat of climate change: The science is undisputed among scientists, but is still up for debate in the public sphere.

The Singapore model is not the worst of all possible end points. It’s one where experts are allowed to be experts, capitalists are allowed to accumulate, and ordinary workers are allowed a semblance of stability. But it leaves no room for the train’s passengers to yell “Stop!” and pick a destination of their own choosing.

“Budapest Station,” named after the powerful right-wing parties that dominate Hungary today, is the final stop for the populist right. Budapest allows us to at least feel like we’re back in charge. We get there by decoupling some of the cars hurtling us forward and slowly reversing. We’re all in this together, unless you’re an outsider who doesn’t have a ticket, and then tough luck.

The “Trump train” is headed this way. President Trump can’t offer tangible gains for ordinary people by challenging elites, but he can offer a surface-level valorization of “the worker” and stoke anger at the alleged causes of national decline — migrants, bad trade deals, cosmopolitan globalists. The press, academia and any other noncompliant parts of civil society are under attack. Meanwhile, other than having to adjust to more protectionism and restrictive immigration policies, it’s business as usual for most corporations.

But there is a third alternative: back to “Finland Station,” with all the lessons of the past. This time, people get to vote. Well, debate and deliberate and then vote — and have faith that people can organize together to chart new destinations for humanity.

Stripped down to its essence, and returned to its roots, socialism is an ideology of radical democracy. In an era when liberties are under attack, it seeks to empower civil society to allow participation in the decisions that affect our lives. A huge state bureaucracy, of course, can be just as alienating and undemocratic as corporate boardrooms, so we need to think hard about the new forms that social ownership could take.

Some broad outlines should already be clear: Worker-owned cooperatives, still competing in a regulated market; government services coordinated with the aid of citizen planning; and the provision of the basics necessary to live a good life (education, housing and health care) guaranteed as social rights. In other words, a world where people have the freedom to reach their potentials, whatever the circumstances of their birth.

We can get to this Finland Station only with the support of a majority; that’s one reason that socialists are such energetic advocates of democracy and pluralism. But we can’t ignore socialism’s loss of innocence over the past century. We may reject the version of Lenin and the Bolsheviks as crazed demons and choose to see them as well-intentioned people trying to build a better world out of a crisis, but we must work out how to avoid their failures.

That project entails a return to social democracy. Not the social democracy of François Hollande, but that of the early days of the Second International. This social democracy would involve a commitment to a free civil society, especially for oppositional voices; the need for institutional checks and balances on power; and a vision of a transition to socialism that does not require a “year zero” break with the present.

Our 21st-century Finland Station won’t be a paradise. You might feel heartbreak and misery there. But it will be a place that allows so many now crushed by inequity to participate in the creation of a new world.

Richard Freeman on the failure of Swedish socialism

".... The Swedish economic model is perhaps the most ambitious and publicized effort by a capitalist market economy to develop a large and active welfare state. For a long time, many viewed the Swedish model as a more humane and successful form of capitalism and thus as a model for other countries to emulate. This view was shaken when Sweden fell into severe economic crisis in the early 1990s. Between 1990 and 1993, open unemployment rose from 1.4 percent to 9 percent of the labor force. An additional 5 percent of the labor force participated in labor market programs so that 14 percent of the labor force was jobless. The employment rate fell by 12 percentage points from its precrisis peak. The economic decline brought government spending above 70 percent of national income, raised the budget defi cit to 12 percent of gross domestic product (GDP), and forced the government to reduce public- sector employment. Between 1990 and 1994, the ratio of debt to GDP doubled. Even before the crisis, however, Sweden’s economic performance was not exemplary. Slow productivity growth had eroded Sweden’s position in real per capita income relative to other Organization for Economic Cooperation and Development (OECD) countries; private- sector employment had not grown since the 1960s; and recurring current account defi cits led to currency devaluations. The Swedish model was no longer anyone’s envy..."

Richard Freeman, Birgitta Swedenborg, and Robert Topel, "Reforming the Welfare State: Recovery and Beyond in Sweden," National Bureau of Economic Research, February 2010, https://www.nber.org/chapters/c5357.pdf

Governing Magazine Staff, "States With Most Government Employees: Totals and Per Capita Rates," Governing, Accessed May 5, 2020, https://www.governing.com/gov-data/public-workforce-salaries/states-most-government-workers-public-employees-by-job-type.html

Payroll amounts, which cover only the month of March 2014, reflect salaries, wages, fees, commissions and overtime before withholdings. They do not include health insurance, retirement and other benefits.

Definitions describing job classification types shown are available in the Census Bureau’s classification manual, beginning on page 373.

Figures do not reflect federal employees or contract workers. The Census survey data also excludes unpaid public officials, volunteers and those who work on a fee basis.

Data notes:

Data are not intended to measure government efficiency or quality of public services.
Read an explanation of factors behind variations in public employment.

Nationally, state and local governments employed about 7.4 million full-time equivalent (FTE) workers in 2014. That's approximately 232 public employees for every 10,000 Americans, according to Governing calculations of Census survey data. Including teachers and those working in education, the total more than doubles to about 16.2 million public employees (excluding federal government) nationwide.

Across states, government employment statistics vary greatly. Unique circumstances tend to account for high or very low concentrations of public employment. Wyoming, for example, employs the most public employees per capita largely due to the public hospitals that it operates. It's followed by Alaska, which has far more natural resources and highways workers than other states.

The following table lists numbers of state and local full-time equivalent (FTE) employees per 10,000 residents. Education employment accounts for roughly half the workforce, so it’s excluded from these calculations. How responsibilities are divided between states and their localities varies considerably, so combined state and local government employment provides for a more comprehensive measure than totals for only state government.

Select a state to view per capita numbers of government workers and public payroll spending given a state's total personal income for each government function. National 50-state averages are shown for comparison.

States With Most Government Employees: Totals and Per Capita Rates

Mark Perry, "Suppose you live in America’s most liberal state. Now suppose you live in the state known as “poverty capital of America.” But I repeat myself.," American Enterprise Institute, May 15, 2019, https://www.aei.org/carpe-diem/suppose-you-live-in-americas-most-liberal-state-now-suppose-you-live-in-the-state-known-as-poverty-capital-of-america-but-i-repeat-myself-2/

Suppose you live in America’s most liberal state. Now suppose you live in the state known as “poverty capital of America.” But I repeat myself

On an individual state basis, the biggest changes in a state’s poverty rate between the two measures in each direction are: a) California’s official poverty rate of 13.4% ranked it No. 16 but the state moved up to No. 1 at 19.0% (highest state poverty rate in the US) using the SPM ( a difference of +5.6%) and b) Mississippi’s poverty rate ranked it No. 2 at 19.5% using the official measure but No. 4 at 15.9% using the SPM (a difference of -3.6%). Overall, 21 states, including California showed a greater percentage of people in poverty using the SPM, 26 states, including Mississippi, showed a lower percentage of people in poverty and two states showed no change (Georgia, Alaska, Washington).

Obviously, the reason for the increase in California’s (and 20 other states) poverty rate using the SPM is because of the state’s high cost-of-living including sky-high housing costs (median home price of $548,700) and because of high taxes and energy costs. And the decrease in Mississippi’s SPM poverty rate (and 25 other states) is because of that state’s low cost-of-living, including low housing costs (median home price of $128,700).

A January 2018 LA Times op-ed by Kerry Jackson, Pacific Research Institute fellow in California Studies, uses the SPM measure of poverty to answer the question “Why is liberal California the poverty capital of America?” Here’s an excerpt:

Guess which state has the highest poverty rate in the country? Not Mississippi, New Mexico, or West Virginia, but California, where nearly one out of five residents is poor. That’s according to the Census Bureau’s Supplemental Poverty Measure, which factors in the cost of housing, food, utilities and clothing, and which includes non-cash government assistance as a form of income. Given robust job growth and the prosperity generated by several industries, it’s worth asking why California has fallen behind, especially when the state’s per-capita GDP increased approximately twice as much as the U.S. average over the five years ending in 2016 (12.5%, compared with 6.27%).

It’s not as though California policymakers have neglected to wage war on poverty. Sacramento and local governments have spent massive amounts in the cause. Several state and municipal benefit programs overlap with one another; in some cases, individuals with incomes 200% above the poverty line receive benefits. California state and local governments spent nearly $958 billion from 1992 through 2015 on public welfare programs, including cash-assistance payments, vendor payments and “other public welfare,” according to the Census Bureau. California, with 12% of the American population, is home today to about one in three of the nation’s welfare recipients.

Kerry Jackson identifies several specific factors that collectively contribute to making California the “poverty capital of America.”

1. Welfare State Bureaucracy and Lack of Pro-Work Welfare Reform. The state and local bureaucracies that implement California’s antipoverty programs have resisted pro-work reforms. In fact, California recipients of state aid receive a disproportionately large share of it in no-strings-attached cash disbursements. It’s as though welfare reform passed California by, leaving a dependency trap in place. Immigrants are falling into it: 55% of immigrant families in the state get some kind of means-tested benefits, compared with just 30% of natives.

Self-interest in the social-services community may be at fault. To keep growing its budget, and hence its power, a welfare bureaucracy has an incentive to expand its “customer” base. With 883,000 full-time-equivalent state and local employees in 2014, California has an enormous bureaucracy. Many work in social services, and many would lose their jobs if the typical welfare client were to move off the welfare rolls.

2. High Housing Costs. Further contributing to the poverty problem is California’s housing crisis. More than four in 10 households spent more than 30% of their income on housing in 2015. A shortage of available units has driven prices ever higher, far above income increases. And that shortage is a direct outgrowth of misguided policies …. including restrictive land-use regulations that drive up the price of land and dwellings.

3. High Energy Costs. Extensive state environmental regulations aimed at reducing CO2 emissions make energy more expensive, also hurting the poor. By some estimates, California energy costs are as much as 50% higher than the national average. According to a 2015 Manhattan Institute study nearly 1 million California households face energy expenditures exceeding 10% of household income. In certain California counties, the rate of energy poverty was as high as 15% of all households.

4. $15 an Hour Minimum Wage. Looking to help poor and low-income residents, California lawmakers recently passed a measure raising the minimum wage from $10 an hour to $15 an hour by 2022 — but a higher minimum wage will do nothing for the 60% of Californians who live in poverty and don’t have jobs. And research indicates that it could cause many who do have jobs to lose them. “Estimates suggest that a one-dollar increase in the minimum wage leads to a 14% increase in the likelihood of exit for a 3.5-star restaurant (which is the median rating),” according to a Harvard University study. These restaurants are a significant source of employment for low-skilled and entry-level workers.

And here is the pessimistic conclusion of Jackson’s op-ed:

With a permanent majority in the state Senate and the Assembly, a prolonged dominance in the executive branch and a weak opposition, California Democrats have long been free to indulge blue-state ideology while paying little or no political price. The state’s poverty problem is unlikely to improve while policymakers remain unwilling to unleash the engines of economic prosperity that drove California to its golden years.

Related: California ranked last year as America’s No. 2 Outbound State (second only to Illinois) based on household moves (64% outbound vs. 36% inbound) according to North American Van Lines’ 2018 US Migration Report. It is also noteworthy that 2017 was the first year that California (at 60% outbound) ever ranked in this national study’s Top Five outbound US states and that out-migration in recent years (64% last year) might be partly explained by the Golden State’s new status as the “poverty capital of America.”

Note: This is an update of a January 2018 CD post that generated more than 100 comments.

“…Using the PCE, the wages of a typical worker have increased by 32% over the past three decades. That’s a significant increase in purchasing power.What about the distribution of wages, rather than the average? Median wages — for all workers, not just production and nonsupervisory workers — grew by 25% over the past three decades (using the PCE deflator). Wages for the bottom 20% of workers grew by more than one-third….”

Michael Strain, "The Story of Stagnating Wages Was Mostly Wrong," Bloomberg, May 15, 2019, https://www.bloomberg.com/opinion/articles/2019-05-15/wage-stagnation-was-mostly-a-myth

The Story of Stagnating Wages Was Mostly Wrong

Wages have been stagnant for decades for everyone except those at the very top: How often have we heard this claim? Presidential candidates frequently assert it as fact, as do some prominent economists, commentators and other opinion leaders.

The problem is it is more wrong than right.

You can make a case for it, of course. First, you have to select a measure of wages. Let’s go with the average hourly earnings of production and nonsupervisory employees, produced by the Bureau of Labor Statistics. About four in five people in the labor force are included in this group, and they can be thought of (roughly) as workers, not managers. They are often described as “typical workers.”

Second, you need to select a measure of price inflation to make an apples-to-apples comparison of the purchasing power of wages in different years. Economists and analysts commonly select a consumer price index (CPI) research series.

Third, pick the period over which to make the comparison. It is common to go back to 1973, in part because of the (incorrect) assertion that in this year a gap opened between worker pay and productivity.

With these choices, wages have grown a measly 5%. That weak growth is reasonably described as stagnant.

Much here is driven by the relatively poor performance of wage growth during the 1970s and 1980s. Rather than going back five decades, let’s go back three, and compare wages today with what they were in July 1990, a business-cycle peak.

If we start there — and use the same wage series and inflation adjustment as before — we find that wages have grown by 20%. While that is slow compared with the gains enjoyed by the top 1%, it is a significant increase in purchasing power.

There are two other arguments for going back three decades rather than five. Making apples-to-apples comparisons of the purchasing power of wages becomes much more difficult the further back you go. How do you compare the price of a car in 2019 with one in 1973, given the significant improvements in automobiles? How do you compare the price of a laptop in 2019 with one in 1973, given that none existed in the 1970s?

When policymakers and opinion leaders argue that wages have been stagnant for decades, many people hear that as referring to their own wages — that is, the wages of today’s workers. This strengthens the argument for comparing today’s wages with those of the early 1990s (or even more recently), rather than going back to the early 1970s, when many of today’s workers were just children.

The case for the stagnation story gets even weaker when you scrutinize the choice of price index. The Federal Reserve and Congressional Budget Office prefer the “personal consumption expenditures price index” to the CPI research series. The PCE better takes into account that consumers can substitute products in response to price changes. For example, if the price of strawberries goes up, you might buy fewer strawberries and more raspberries. By not accounting for consumers’ ability to substitute goods that are relatively cheaper, the CPI overstates inflation.

Using the PCE, the wages of a typical worker have increased by 32% over the past three decades. That’s a significant increase in purchasing power.

What about the distribution of wages, rather than the average? Median wages — for all workers, not just production and nonsupervisory workers — grew by 25% over the past three decades (using the PCE deflator). Wages for the bottom 20% of workers grew by more than one-third.

While wages are the most important component of a worker’s total compensation, they are not the only component. Employer-provided health insurance is typically a worker’s most important non-cash benefit, and it has been increasingly expensive for businesses to buy for workers. When you factor in benefits, the story about stagnating income is even weaker.

You might argue that what really matters is the flow of resources a household can use for consumption and savings, whether or not those resources come from paid employment. The CBO computes a comprehensive measure of income that includes (but is not limited to) wages, salaries and fringe benefits; capital gains and dividends; Social Security, Medicare and Medicaid benefits; unemployment insurance, food stamps and federal tax payments.

Using this measure, median household income grew by 43% between 1990 and 2015 (the last year for which data is available). Households in the bottom 20% saw their incomes increase by 62%.

I’m not trying to be sanguine here. Americans have high expectations for wage and income growth, and we shouldn’t be satisfied with the gains we’ve enjoyed over the past three or five decades. We need better policies that allow workers — particularly those at the bottom — to command higher pay. And slow wage growth after the Great Recession frustrated and scarred too many U.S. workers.

But messages matter. If all people hear is that wages have been stagnant for decades as part of a game rigged to benefit people at the top — well, they might believe it. And they might act on what they believe, lowering their aspirations and reducing their effort in the labor market. On the other hand, if they hear that slow and steady wage gains have produced significant increases in purchasing power over the last several decades, they might feel more optimistic about the value of work.

At a minimum, they might have a more accurate understanding of what’s actually been happening in their communities and society the past many years.

Great charts

Howard R. Gold, "Never mind the 1 percent Let's talk about the 0.01 percent," Chicago Booth Review, 2017, https://review.chicagobooth.edu/economics/2017/article/never-mind-1-percent-lets-talk-about-001-percent

Never mind the 1 percent Let's talk about the 0.01 percent

Since the Great Recession, America’s wealthiest 1 percent have been demonized as fat cats who have grown ever richer while the middle class has stagnated. While protesters have called for the 1 percent to be taxed more heavily, economists have been digging into data to develop a better understanding of who the top earners are.

These economists have been seeking to measure income inequality and wealth inequality, and to understand the nature of the 1 percent’s income and assets. And views differ. Some say the 1 percent are predominantly entrepreneurs and the “working rich,” people who made their money by starting and running successful businesses. Other economists note that a significant proportion of the 1 percent are the heirs of wealth accumulated over time.

But the data also reveal disparities within the 1 percent. The 1 percent, it turns out, have their own 1 percent.

Mankiw noted that the 1 percent’s share of total income, excluding capital gains, rose from about 8 percent in 1973 to 17 percent in 2010, the latest figures available at the time. “Even more striking is the share earned by the top 0.01 percent.... This group’s share of total income rose from 0.5 percent in 1973 to 3.3 percent in 2010. These numbers are not easily ignored. Indeed, they in no small part motivated the Occupy movement, and they have led to calls from policymakers on the left to make the tax code more progressive.”

In the nearly five years since Mankiw’s paper, economists have assembled more data with which to analyze the 0.01 percent. In the 35 years ending in 2015, the share of total income has accrued faster to the 0.01 percent than it has to the rest of the 1 percent. The share of total income has risen, according to 2015 data, to 5 percent for the 0.01 percent and 22 percent for the 1 percent. The 0.01 percent’s share of total US wealth quadrupled in the 35 years ending in 2012 to 11 percent, argue University of California at Berkeley’s Emmanuel Saez and Gabriel Zucman, who have made wealth calculations through 2012.

But the disparities within the 1 percent have intrigued other economists. Who are the 0.01 percent? How well are they really doing? How are they making their money? And how, if at all, should policy makers respond?

The 0.01 percent, by the numbers

The United States has 325 million people—in 160 million households, as viewed by the Internal Revenue Service. That means 1.6 million households fall into the 1 percent category.

The threshold for membership in the 1 percent in 2014 was an annual household income of $386,000, excluding any capital gains, according to Chicago Booth’s Eric Zwick. That’s more than seven times the median household income that year of $54,000. The 0.1 percent, 160,000 families, in 2014 made at least $1.5 million a year. The top 0.01 percent, 16,000 families, had annual income of $7 million.

Income share is another way to assess how the strata of the 1 percent are doing.

After-tax income tells a similar story. For the top 1 percent, it nearly tripled between 1980 and 2014, according to research by Paris School of Economics’ Thomas Piketty and UC Berkeley’s Saez and Zucman. For the top 0.1 percent, it almost quadrupled in the same period. And posttax income for the 0.01 percent rose 423 percent. Posttax income for the entire US population rose by only 61 percent during this time, the study demonstrates.

The 0.01 percent also perform best in comparisons of wealth. Saez and Zucman, in an influential 2014 study, used income data from the IRS to “capitalize,” or derive, wealth based on the expected aggregate rate of return from every asset class or source of income reported on tax returns. They say the share of total wealth of the top 1 percent has increased steadily, from below 25 percent in 1978 to 42 percent in 2012. The share of total wealth of the top 0.1 percent has roughly tripled, and the share of the 0.01 percent has more than quintupled. The top 0.01 percent of US households had at least $111 million in net worth in 2012, compared to $4 million for the 1 percent.

The top 1%...

And Piketty and Saez’s income-share data show that long-term growth has stagnated since 2000 for the 1 percent, 0.1 percent, and 0.01 percent, argues Chicago Booth’s Kaplan. All three groups saw their income shares and inflation-adjusted incomes peak in 2007, and those shares have yet to recover to those pre-Great Recession levels, he points out.

University of Chicago’s Greg Kaplan says the main point of recent research he did with University of Minnesota’s Fatih Guvenen is to highlight that there’s variety in the group so many know as the 1 percent. “When I hear people talk about top income inequality, I hear words and phrases such as ‘top 1 percent,’ ‘top 0.1 percent,’ ‘top earners,’ ‘CEOs’... thrown around all the time,” he says. “I think we need to keep in mind that these are very different people. They get their income from very different sources. They live in different parts of the country.... There is a huge amount of diversity, even within a group that we think is small but is actually very big, which is the top 1 percent.”

Who’s in the 0.01 percent?

When discussing the super-rich, many bring up family dynasties such as the Waltons of Wal-Mart, or the Rockefellers and Koch brothers of energy fortunes. They may think, too, of highly paid corporate executives such as Apple CEO Tim Cook (who made $150 million in 2016, according to Bloomberg), celebrities such as Diddy (who took home $130 million pretax in the year through June 2017, per Forbes), and entrepreneurs such as Facebook founder Mark Zuckerberg (No. 5 on Forbes’ 2017 list of the world’s billionaires).

But who is actually in the 0.01 percent? Researchers are developing a better understanding of how people in various rungs of the 1 percent make their money. And some research suggests business income plays a big part.

Since the late 1990s, “nearly all of the recent rise in top incomes has come in the form of business income,” write Matthew Smith of the US Treasury Department, Danny Yagan of UC Berkeley, and Chicago Booth’s Owen Zidar and Zwick, whose work focuses on the 1 percent and 0.1 percent. “The demand for top skill has outpaced its supply, with the returns to top skill increasingly taking the form of business income.”

Smith, Yagan, Zidar, and Zwick find that the 1 percent’s income is being driven by owner-managers, mostly of small and medium-sized companies—specifically S corporations, partnerships, and limited liability companies. These are talented managers: the researchers find that profits of companies run by these 1 percent-ers are far higher than those of businesses owned by people in the top 5--10 percent. In the researchers’ sample, when these businesses’ owners died prematurely, while still running their companies, profits plunged by more than half.

The average company in the top 1 percent of income has $7 million in sales and 57 employees, according to the research. “If that firm has, say, a 10 percent profit margin to split between two owners, it’s enough to put someone in the top 1 percent category,” says Zwick. The businesses earning the most profits in the bulk of the top 1 percent were physicians’ and dentists’ offices, professional and technical services, specialty trade contractors, and legal services.

It’s harder to get at the source of income for the top 0.01 percent, but several studies indicate that finance could be an important sector for the group. Williams College’s Jon Bakija, the US Treasury Department’s Adam Cole, and Indiana University’s Bradley T. Heim find that one-fifth of the primary taxpayers in the top 0.1 percent of income (including capital gains) work in finance. The latest data used in this study are from 2005, before the 2007-10 financial crisis altered the landscape. But between 2008 and 2012, “finance and insurance is by far the most highly represented industry among the highest earners,” find Guvenen and Kaplan, who looked at the 0.1 percent. In the rest of the 1 percent, health care is the most represented sector.

Beyond that, there’s more detailed information about only the very richest of the 0.01 percent, and it seems to suggest that the richest members of the group may own large, successful businesses. Kaplan and Stanford’s Joshua Rauh used Forbes’ “rich list” as a data set on the wealth of the richest Americans. Since 1982, Forbes has compiled an annual list of the 400 wealthiest Americans, using public information, private interviews, and valuations of comparable assets. As the rich list comprised 400 households, it represents the top 2.5 percent of the 0.01 percent—the top 0.00025 percent of US households.

But this small group could control more than a quarter of the income in the 0.01 percent. According to Saez and Zucman’s calculations, in 2012 the top 0.01 percent had an average wealth of $371 million, which would imply a collective total of $6 trillion. That same year, the estimated combined net worth of the individuals on the Forbes 400 list was $1.7 trillion.

Among the group who made the rich list, for almost one in four, finance—especially hedge funds and private equity—was the source of wealth, while 15 percent came from technology-based companies. Food and beverage companies accounted for 10 percent.

And these sectors were on the upswing. “The ‘finance and investments’ category grew in representation by around 16 percentage points, technology (both computer and medical) by 11 percentage points, and retail/restaurant by 10 percentage points,” Kaplan and Rauh write.

On the 2016 rich list, two-thirds were self-made and one-third had inherited at least part of their fortune. More than 10 percent were immigrants to the US.

How did they get so wealthy?

Piketty and Saez have theorized that investments grow faster than the economy, giving entrenched dynasties insuperable advantages. But Kaplan and Rauh argue that the super-rich are predominantly creating rather than inheriting wealth. Kaplan also says that wealth in this group has been fueled by a marriage of in-demand skills, globalization, and technology—the combination of which are allowing businesses to scale up as never before.

Skills, say many economists, are critical to the modern economy. As the US economy grows, jobs are going unfilled as companies scramble to find skilled people to hire. There’s a flip side to this: as certain skills have become scarce, this has raised the amount companies are willing to pay people who have them. The situation has similarly raised the amount of profits skilled company owners can make, and technology and globalization are further magnifying the value of in-demand skills.

In the Information Age, the change has been particularly pronounced. “In business, you can use technology to do things you couldn’t do 30 years ago,” says Steve Kaplan. “You can scale your business using technology, and you can use people in India and China and all over the world—you couldn’t do that as effectively 30 years ago.” This, he argues, has been spectacularly positive for poorer people in developing countries. In 1990, the World Bank estimated that roughly 35 percent of the world lived in extreme poverty. Today, less than 11 percent of the world’s population is so impoverished.

And it has been good for wealthy residents of developed countries. For them, the result has taken the form of the “superstar” or “winner-take-all” phenomenon, first identified in a landmark 1981 paper by the late Sherwin Rosen, who taught at the University of Chicago. “In certain kinds of economic activity there is concentration of output among a few individuals,” wrote Rosen. “Relatively small numbers of people earn enormous amounts of money and dominate the activities in which they engage.”

Technology, from the internet to media such as ESPN and Bloomberg terminals, has given elite athletes, entertainers, entrepreneurs, and financiers the ability to profit on a much larger, global scale, making the fruits of their labor more valuable than what previous superstars, such as, say, Pelé or Babe Ruth, brought in. Ruth’s peak salary of $80,000 would be worth about $1.1 million in 2016 dollars, around one-thirtieth of the $33 million the highest-paid Major League Baseball player, pitcher Clayton Kershaw of the Los Angeles Dodgers, made in salary alone in 2016.

The world’s hundred highest-paid athletes, led by Cristiano Ronaldo and LeBron James, stars of soccer and basketball, respectively, “banked a cumulative $3.11 billion” over the past 12 months, Forbes calculated this past June. Among entertainers, rapper/entrepreneur Diddy and singer Beyoncé each raked in more than $100 million over the same period, Forbes estimated.

And hedge-fund managers make multiples more than top athletes and entertainers. James Simons of Renaissance Technologies and Ray Dalio of Bridgewater Associates each made more than $1 billion in 2016, even though, as Institutional Investor’s Alpha reported, the top-25 hedge-fund earners took in the least as a group since 2005, largely because of the industry’s overall poor investment performance.

“Technology allows a hedge fund to be able to manage $20 billion and invest it,” says Steve Kaplan. “I don’t think people had the systems and information to do that 20 to 30 years ago. Now they have the systems and the information to do that. That technological change is here and is not going away. If anything, it’s getting stronger.”

What should policy makers do (if anything)?

The question of what, if anything, should be done in response to the spectacular rise of the 0.01 percent is a thorny one, as Mankiw acknowledged. “At the outset, it is worth noting that addressing the issue of rising inequality necessarily involves not just economics but a healthy dose of political philosophy,” he wrote.

When policy makers want to address the concentration of income and wealth, the first place some have looked is the top marginal tax rate, which slid in the US and other developed countries after the Reagan and Thatcher revolutions. The US and UK had tax rates as high as 80 percent, wrote Saez and Piketty in the Guardian in 2013. “The job of economists should be to make a top rate tax level of 80 percent at least ‘thinkable’ again.” But on this, Steve Kaplan disagrees. Raising the top marginal rate could send people and their money scurrying for tax havens, he says, pointing to France as an example.

Raising the top tax rates in the US could also send people to take advantage of more favorable tax rules within the code itself. And closing perceived loopholes can be controversial. For example, some people working in finance benefit from the code’s treatment of carried interest, where income flowing to the general partner of an investment fund is typically treated as capital gains and therefore taxed at a lower rate.

Then there’s the issue of whether raising the top marginal rate could discourage business activity. The marginal rate is intended to tax individuals on their earnings, and it rises with income. But a lot of business income is being taxed at that marginal rate rather than a corporate rate. Because the top US marginal personal tax rate was lower than the corporate rate for some time, business owners had an incentive to change their form of corporate organization from the traditional C corporation, which has profits taxed at the higher, corporate rate, to a partnership, limited liability corporation, or S corporation, taxed at the lower, individual rate. By 2011, these pass-through entities accounted for most of the business income earned in the US. (For more, see “The $100 billion tax dodge,” Summer 2016.)

Policy makers should design an income-tax system that takes into account the nature of the income, and design a system that harmonizes taxes to discourage people from shopping the code for the best tax rates, Zwick suggests—recognizing this is a tall order.

And despite his research interest, Greg Kaplan says we should be careful about populist reactions that lead us to focus too much on the super-rich: “We are better off concentrating on how to improve the lives of those in the bottom 50 percent.” In this group, many workers are in desperate need of a skills upgrade. As these workers fall behind, many economists say, policy makers need to focus on better preparing them for the workforce, perhaps by investing in education, working more closely with local companies to determine what skills their workers need, and removing barriers such as onerous regulations preventing people from entering certain professions. (For more, see “How to create middle-class jobs,” Summer 2017.)

In short, there’s a split among economists. Some argue that income needs to be distributed more equitably, while others say governments should focus less on taking actions that could inhibit top earners and more on addressing the reasons others aren’t as successful. Do we slow the 0.01 percent or lift the 99.99 percent, which could be a heavier and more complex assignment? As the debate continues, members of the 0.01 percent continue on their course.

".... Foreign-born workers—those not born in the U.S. nor having U.S. citizens as parents—accounted for 17.5% of all U.S. employees in 2018, up from 17.1% in 2017....There were 27.2 million U.S. workers who were born outside the country last year, up 3.7% from a year earlier. That was an acceleration from 1.8% growth in 2017, and the fastest rate of foreign-born employment growth since 2012. Growth rates can be variable from year to year, but the trend in the past decade has been strong growth in foreign-born workers and little change for native born. The number of foreign people in the U.S. labor force—including workers and those seeking jobs—rose 17.2% over the decade ending in 2018. The native-born labor force increased by 2.8% in that time.....The data showed that foreign-born workers earned less than native-born Americans. Median weekly earnings for a foreign-born worker was $758 compared with $910 for a native-born workers. However, earnings for foreign-born workers rose at a faster rate last year.The earnings discrepancy in part reflects differences in education levels. Of the foreign-born labor force age 25 and older, 21.2% haven’t completed high school compared with 4.1% of native born...."

Eric Morath, "Foreign-Born Workers Make Up Highest Percentage of U.S. Employment Since 1996,"Wall Street Journal, May 16, 2019, https://www.wsj.com/articles/foreign-born-workers-make-up-highest-percentage-of-u-s-employment-since-1996-11558021429

"...We observe an increase from 13% in 1999 to 16% in 2013. That is, the number of foreign inventions owned by the U.S. has increased at a faster pace than the number of total patent applications in the U.S. Therefore, U.S. engagement in knowledge sharing is increasing over time...."

Ana Maria Santacreu, "Globalization of Innovation and the Increase of Knowledge Sharing," Federal Reserve Bank of St. Louis, May 14, 2019, https://www.stlouisfed.org/on-the-economy/2019/may/globalizing-innovation-increasing-knowledge-sharing