Macro Roundup

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

“…By virtually any definition of economic well-being, Americans are substantially better off today than they were a half-century ago. So how did we obtain this massive cornucopia of prosperity without a pay raise since 1972? Part of the problem is that the BLS’s measure of average hourly earnings excludes employer-provided benefits, which now make up 30% of compensation. Counting the value of worker benefits adds 5% to the 46-year increase in total compensation. More significant, the official index used to adjust for inflation—the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W—overstates actual inflation and understates real compensation. Nominal average hourly earnings rose from $3.99 in October 1972 to $23.26 this March, a 483% increase, but CPI-W also rose 483%, creating the reported stagnation in real average hourly earnings. While the CPI-W accurately measures changes in price for a fixed market basket of goods and services, it overestimates inflation because it fails to account for the substitution effect—how people change their consumption habits as relative prices change. Americans began to fly more often in the 1970s when the cost of airfare fell relative to the cost of ground transportation, for example, but the CPI-W missed this increase in consumer value by neither raising the weight it assigned to spending on air travel nor downgrading the weight for ground travel….”

Phil Gramm and John Early, "The Myth of ‘Wage Stagnation’,"Wall Street Journal, May 17, 2019, https://www.wsj.com/articles/the-myth-of-wage-stagnation-11558126174

The Myth of ‘Wage Stagnation

Perhaps the most common indictment of America’s legendary prosperity is wage stagnation. Bureau of Labor Statistics data show that average hourly earnings of production and nonsupervisory employees peaked in October 1972 at $23.26 (in 2019 dollars) and were at that same level in March 2019. But do these numbers remotely describe the life you have lived over the past 45 years, or square in any way with numerous official measures of changes in what Americans actually own and consume? In short, should you believe your eyes or government data?

Compared with 1972, American homes today are much more spacious and modern. The proportion of homes today that have two or more rooms per person is up 33.5%. The share of homes with two or more bathrooms has more than doubled; central air-conditioning is more than three times as common; and the share of homes that have dishwashers is up by more than two-thirds. Most homes in 1972 had televisions, but only about half were color sets. Today they are all color and most are flat screens in high definition, attached to cable or satellites. The average home in 1972 had at least one phone, but none had cellphones or internet access.

Kitchens today are stocked with a far wider array of foods, including out-of-season fruits brought from half a world away and a vast variety of prepared foods. Compared with 1972, this abundance costs an ever smaller portion of families’ budgets, freeing up some $3,200 on average to spend on other things.

Cars last 81.3% longer and are 72.7% safer, and many have GPS navigation and premium sound systems. No standard model lacks air-conditioning or power steering. The share of the population with college degrees is almost three times as high. Americans live 7.4 years longer and their median age is almost 10 years older, yet the proportion of people reporting poor health is 20.3% lower. Real median household net worth is up 172.2%.

By virtually any definition of economic well-being, Americans are substantially better off today than they were a half-century ago. So how did we obtain this massive cornucopia of prosperity without a pay raise since 1972?

Part of the problem is that the BLS’s measure of average hourly earnings excludes employer-provided benefits, which now make up 30% of compensation. Counting the value of worker benefits adds 5% to the 46-year increase in total compensation.

More significant, the official index used to adjust for inflation—the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W—overstates actual inflation and understates real compensation. Nominal average hourly earnings rose from $3.99 in October 1972 to $23.26 this March, a 483% increase, but CPI-W also rose 483%, creating the reported stagnation in real average hourly earnings. While the CPI-W accurately measures changes in price for a fixed market basket of goods and services, it overestimates inflation because it fails to account for the substitution effect—how people change their consumption habits as relative prices change. Americans began to fly more often in the 1970s when the cost of airfare fell relative to the cost of ground transportation, for example, but the CPI-W missed this increase in consumer value by neither raising the weight it assigned to spending on air travel nor downgrading the weight for ground travel.

In contrast, the Commerce Department’s personal-consumption expenditures price index updates the market basket of goods and services monthly based on what people actually buy, allowing it to account partially for the substitution effect. Since 2000 the Federal Reserve has used this index to set monetary policy because it’s a more accurate measure of inflation. In designing the 2017 tax reform, Congress indexed the new income-tax brackets using a similar index to account for product substitution. Using the PCE price index rather than the conventional CPI-W to adjust compensation results in real hourly compensation levels that are 27.7% higher today than they were in 1972.

The biggest challenge in measuring real compensation and Americans’ well-being is the extraordinary growth in new products that have brought new benefits not captured in any government consumer price metric. The BLS does add new products to its index when they become widely used, but it often misses the initial price decline and understates the product’s impact on consumer welfare, including displacement of other, older products. The cellphone was first introduced as a specific item in the CPI-W in 1998. But because the device entered the index 14 years after the first public sale, the index never accounted for the preceding 75% drop in cellphone prices, nor the value of their lighter batteries and longer-lasting charge.

It may be impossible to discern perfectly what share of changes in the costs of goods and services comes from inflation compared with the share that comes from real increases in value. But in communications technology, for instance, it’s clear that no government metric comes close to capturing the full value of technology as America has progressed from the Pony Express to the telegraph, telephone, portable phone, cellphone and the smartphone.

Today 224 million Americans have at our fingertips more than two million apps, forecasting the weather anywhere in the world and showing us how to get anywhere we want to go. We communicate immediately without stationery or stamps or driving to the post office. We get medical advice without going to the doctor and obtain instantaneous access to more knowledge than is in the local library. We shop from our armchairs and work for companies thousands of miles away. Yet no government consumer-price index has ever come close to adjusting for the value embodied in this one of many miracle innovations.

Economists Bruce Meyer and James Sullivan attempted to correct for some of this problem in a 2013 study, integrating the findings of 52 different economic studies to develop a price index that adjusts more completely for changes in quality and innovation, as well as substitution. For example, using data from the American housing survey to quantify size and quality, they determined that the CPI overstates housing inflation by about 0.25% a year because it mistakes higher payments for bigger and better homes for real price increases.

They also used hedonic regression, a method of calculating implicit market prices for different features of an item, to demonstrate that the CPI overstates the yearly rate of increase in prices for personal electronic devices by as much as 5.8%. They corrected the CPI’s overestimation of the yearly rise in health-care costs by pricing based on treatment of a condition, as well as differences in outcomes such as survival, recovery and function.

Messrs. Meyer and Sullivan’s improvements are only a modest beginning of the needed revisions to traditional measures of inflation. Yet they provide convincing evidence that at a minimum, real compensation, in terms of the value of what we can actually buy, hasn’t stagnated since 1972, but instead has grown by at least 69.5%. For most of us who were around in 1972, that 69.5% increase more closely fits the world we live in.

The suggestion that America hasn’t gotten a raise in 46 years doesn’t pass the laugh test. Poor measurements of compensation are more than misleading; they also cause many voters and policy makers to favor redistribution that would depress growth and compensation. Nothing is more critical to promoting sound policy than measuring economic outcomes accurately. A nation is only as good as its facts.