There Will Be Rich Always: Finding a New Way to Think About Income Inequality

On Monday, Aaron Edlin and I published a cri de coeur op-ed in the New York Times calling for a Brandeis tax, an automatic tax that would put the brakes on income inequality. In the next few days, Aaron and I will be publishing a series of posts explaining more about our rationale and providing more details on how a Brandeis tax might be implemented.

There Will Be Rich Always
By Ian Ayres & Aaron Edlin

In one of the more memorable lyrics from the musical Jesus Christ Superstar (based on Matthew 26:11), Jesus tells his disciples “There will be poor always.”

The same is true of the rich. There will always be a top 1 percent of income earners. But what it takes to be rich can change drastically over the course of even a single generation. In 1980, you would have had to earn at least $158,000 to be a one-percenter; but by 2006 the qualifying amount had more than doubled to $332,000. (You can produce an estimate of your own household income percentile – albeit using a different definition of income that produces a much higher 1 percent cutoff –  at this wsj.com site.) The rise is not due to inflation as both these numbers are expressed in inflation-adjusted, constant 2006 dollars. The rise is due to the simple fact that our richest Americans in real terms were earning much more money.

The economic changes in the past 30 years were a rising tide that did not lift all boats. Over the same period the median household income remained relatively constant, at roughly $50,000. While inequality has increased in most wealthy economies, the United States, according to the OECD, remains among the most unequal.

The vast shift in national income toward our richest 1 percent is especially vivid if their income is expressed in terms of the median household income. Indeed, an important goal of our op-ed was to suggest a new unit of measure, “medians” to help us think about what it means to be rich. In 1980, if you earned 3.8 medians, you were in the top 1 percent, but by 2006 even the poorest in the 1 percent club earned 6.9 medians. 

What we call the “Brandeis Ratio,” the average income of the richest 1 percent (which includes the billions earned by the lucky few) has grown even more disproportionate. As shown in the chart below, in 1980, one-percenters on average made 12.5 medians, but in 2006 (the latest year in which data is available) the average income of our richest 1 percent was a whopping 36 medians.

Define Rich?

In August 2008, the Reverend Rick Warren asked each of the presidential candidates Barack Obama and John McCain to:

Define “Rich.”  Give me a specific number. Where do you move from middle class to rich?

The candidates’ answers, given at what might be the high-water mark of income inequality in our nation’s history, reveals the difficulties that both parties have talking about economic class. McCain was visibly uncomfortable in naming a number:

So I think if you’re just talking about income, how about $5 million? So, no, but seriously, I don’t think you can — I don’t think, seriously, that — the point is that I’m trying to make here, seriously — and I’m sure that comment will be distorted — but the point is, the point is, the point is that we want to keep people’s taxes low and increase revenues.

In part, McCain was reluctant to name a figure which might be used to construct a new bracket to raise taxes – so he picked a large number; very large in terms of “medians.” McCain suggested that you would have to earn an income that is 100 times the median household income in order to “move from middle class to rich.” 

Obama in contrast gave a much more reasonable answer:

Here’s how I think about it, and this is reflected in my tax plan. If you are making $150,000 a year or less as a family, then you’re middle class, or you may be poor. But 150 (thousand dollars) down, you’re basically middle class. Obviously, it depends on region and where you’re living. . . .  I would argue that if you’re making more than 250,000 (dollars) then you’re in the top 3, 4 percent of this country. You’re doing well. Now, these things are all relative, and I’m not suggesting that everybody who is making over 250,000 (dollars) is living on Easy Street.

Obama should be given points for easily relating his cutoff of $250,000 to those Americans who are “in the top 3, 4 percent of this country.” But we are a little troubled at Obama’s describing family incomes of $150,000 as still being in the middle class, when these families earn 3 times what the median households earn. Survey data reveals contested definitions of middle class, and there is evidence that Americans disagree with Obama. In a 2007 study conducted by NPR, the Kaiser Foundation, and the Harvard School of Public Health, 51 percent of respondents did not consider a family of four with an $80,000 income middle class – that consensus rose to 65 percent when the family income rose to $100,000.

We as a nation seem to have trouble facing up to the fact that most Americans earn far less than what it takes to be comfortably middle class. We would do well to give more emphasis in our definition of the middle class to incomes earned by average Americans. Our aspirational middle class is making it too easy for us to forget what is happening to our actual middle class. 

A larger goal of our op-ed is to spark a different kind of debate about income inequality. Rev. Warren was crafty in that he only asked the candidates the descriptive question: what is rich. But we want people of goodwill to ask a normative analog. In our op-ed, we claim that it “would be bad for our democracy if one-percenters started making 40 or 50 times as much as the median American.” 

Is there any Brandeis Ratio that would give concern to this year’s Republican candidates? We suspect they would be unwilling to express unease with any level of inequality produced by market forces. They would argue that any government attempts to lean against inequality by taxing job-creators would invariably produce distortions (including sending one-percenters abroad, beyond the reach of our tax laws) that would end up making things worse off for middle class Americans. This is a debate worth having, but we cannot begin unless we find a way to engage in normative debate about income and wealth inequality. Asking whether the government should be concerned about the rapid rise of the average one-percent income from 12.5 to 36 median incomes is our way to provoke a more explicit debate.

Seeing Medians

Framing income inequality in terms of “medians” is also part of a larger goal of making the median household incomes more salient. As we said in our op-ed, “Part of our goal is to change the way politicians speak about income equality. Framing the income of the wealthy in relation to the median income will help us all keep in mind the relative success of the middle class.”

It might even be useful to describe other things in terms of medians. A new Cadillac Escalade will run you 1.4 medians. A  year’s tuition at Yale Law School is about .88 medians. We might even restructure government salaries so that they automatically adjust with the median. Paying a congressman 3.5 medians (instead of the current $174,000), might make it easier for our representatives to remember and even pursue the interests of their typical constituents.

To raise the prominence of the median measure, government could standardize a “mi” symbol. A stylized icon figure representing a median earner might even be more effective in letting us remember that to earn 36 median incomes is to earn as much as 36 actual households:

 

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  1. B.D. Warren says:

    So, would employers (who are presumably controlled by 1%ers) then not have the incentive to increase cash salary while at the same time charging employees for a much greater share of their benefits, thus inflating nominal income while keeping real take-home pay unchanged?

    Hot debate. What do you think? Thumb up 12 Thumb down 10
    • human mathematics says:

      By “employers” you must mean “large corporations”.

      Thumb up 2 Thumb down 0
      • dave says:

        no, it is most certainly employers.

        in order to balance or stack the deck, increase the median, employers who make enough to be close, could pay the employees more, but then offer no benefits.
        if your average teacher who currently gets 80 thou plus 28 tho in medical and another 16 thou in pension and other bennies were told they were going to be paid 124k a year, but no bennies. they would make the same, the employer would not see any change, but the 50% increase in income would alter the median.

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      • human mathematics says:

        dave, small employers are often controlled by people well below the 1% (stores, waste disposal service, etc). Large organisations are controlled by the .1% or .01%.

        Thumb up 3 Thumb down 1
  2. Clifton Griffin says:

    The problem with this analysis is that it doesn’t take into account the people who move income brackets (i.e., income mobility).

    See this link: http://mises.org/daily/5799/The-Rich-Arent-Dispossessing-the-Rest

    There will always be rich. There will always be poor. They won’t be the same people year in year out.

    Well-loved. Like or Dislike: Thumb up 41 Thumb down 36
    • rationalrevolution says:

      Yeah, I mean who knows, next year Warren Buffet and John Pualson might be homeless….

      Let’s see Paulson is now 56 years old and took home $5 billion in 2010, so assuming that he just put all of it in cash under his…. well, under a mountain… using just his income from 1 year, with no new income, he could spend $100,000,000 a year every year for the next 50 years (assuming he lives to be 106 years old) before running out of money. Yeah, yer right, I doubt he’ll “be rich again” next year…

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      • Steve O says:

        Not sure why you’re bringing up the richest of the richest of the richest. All they do is skew the numbers–it’s ridiculous and unfair to make policy decisions on, say, the top 50 richest Americans. It has little to do with Clifton’s point, and, if you take into account the fact that Buffett is in the process of giving away as much as 99% of his wealth, I think it’s pretty mean-spirited to disparage people just for having money.

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      • Kris says:

        Since we’re now toward the top of the income inequality scale, but toward the bottom of the upward mobility scale, people who are rich will generally stay rich. People who are poor will generally stay poor.

        I think the “Austrian Economics blog” is irrelevant, as almost everything about Austrian Economics is.

        Thumb up 6 Thumb down 5
    • Travis says:

      Last I checked, financial mobility has become extremely limited in the united states. I heard a study saying that People have roughly a 25% chance to move up or down one economic bracket (when divided into five) and a 1% chance to move from one of the bottom two to the top bracket. Sorry, no source on the exact date (I believe it was on nightly news hour). But multiple sources will confirm, the “American Dream” is more alive in other countries than it is in the US.

      Well-loved. Like or Dislike: Thumb up 32 Thumb down 14
      • Durandal says:

        Yeah, the American Dream is being lived in other countries, the European social democracies ironically enough.

        Indeed, the path to the American Dream is the European Way.”—Parag Khanna, author of The Second World: Empires and Influence in the New Global Order

        When Europeans came to America at first, it was the most egalitarian place on Earth. Now Europe is far more egalitarian.

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      • Jon says:

        Upward mobility is extremely limited.

        Downward mobility is frighteningly easy.

        Well-loved. Like or Dislike: Thumb up 27 Thumb down 4
      • Pshrnk says:

        As others point out upward mobility now occurs more in Europe. It is hard to live in a poor neighborhood in America and not go to a lousy school. Also makes it topugh to find good mentors or role models.

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    • Jeff says:

      I’m sorry, did you just reference a von Mises institute paper on an economics blog?!

      [WORDPRESS HASHCASH] The poster sent us ’0 which is not a hashcash value.

      Thumb up 5 Thumb down 3
    • Jim S says:

      Do you actually expect anyone to take something from the Von Mises group that doesn’t even link to the studies it cites to seriously? It’s nothing but political opinion that seriously overstates economic mobility.

      Thumb up 0 Thumb down 0
    • human mathematics says:

      Clifton, the median and the 1% threshold are robust against bracket mobility.

      You would run into a problem at the bottom 5-10% (there’s a minn. fed paper on this) but not at the 50th percentile.

      Thumb up 1 Thumb down 0
    • dave says:

      look over the Forbes wealthiest list. one for one, they are either self made, or children of those that did. that means the wealthiest are new money, not old. that means fluid upward mobility. very fluid if people from this generation made it in this generation.

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      • human mathematics says:

        dave, That may be true for the top .001%, but social mobility from the bottom decile to the top decile, or even to the median, is low in the US.

        You can see the numbers on Hans Rosling’s talk at a US statistical bureau.

        Thumb up 0 Thumb down 3
      • Paul Rian says:

        human mathematics: And who cares? Obviously regression to the mean isn’t going to totally condemn the children of the 1% of top men to mediocrity, even if they marry solely on boobs over any sort of brains.

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      • dave says:

        “who cares” well, we are seeing this as an election year issue in which the largest corporation is trying to alter common sense with regulations and taxes. that this discussion is even occurring shows the total lack of understanding.

        warren buffet does not have to make a dime. he can use every penny to buy more land, more buildings, build whatever he wants. he can literally spend billions on new homes. if they do not sell, he has no profit, no income. zero income.
        then he could sell them off at a huge profit and buy more or sell them off at a loss and destroy home values for years.

        the concept is not income, taking about that is a waste of time. it is about control of money. if we had a gov’t interested, we would all be wealthy. the gov’t could fix the home mortgage problem in a day and for a fraction of the cost of the social experiments of the last years. it could fix medical insurance in a day, without crippling the future. ( your new free gov’t medical insurance costs about $7,000 per person, 28k for a family of four btw)

        Warren Buffet proposed that if the US spending exceeds 2.5% of GDP, that no one is allowed to run for re-election. THAT would be a change we can believe in !

        THAT would make jobs and high wages a goal of gov’t. I am not sure about your kids but mine have a very bleek future. no jobs for kids in high school.

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      • human mathematics says:

        Paul Rian: I don’t care if the children of the super-rich fall to mediocrity. I only care that poor people can rise up.

        Thumb up 2 Thumb down 0
      • human mathematics says:

        dave: if we had a gov’t interested, we would all be wealthy.

        If you’re talking about the U.S., then nearly all of you are wealthy. http://globalrichlist.org

        Thumb up 3 Thumb down 0
  3. K. Clark says:

    I frankly don’t understand or agree with high executive pay. Talent is plentiful in the world and there is no reason to pay a CEO multiple millions. But, the answer is to put all the power into the hands of the stockholders. All of it. If they continue to make stupid decisions then, live with it.

    But, one of my concerns with this question is that it is asked by academics. We’re smart – why do they earn more than us? Because you produce nothing anyone wants. You have abilities, they just have no value. So the obvious solution is to use the power of the police state to steal it from someone else. The reality is that most academics are already vastly over compensated. Want to earn more? Build something. Create something. Something that people value and are willing to pay for. Everything else is stealing.

    Hot debate. What do you think? Thumb up 40 Thumb down 41
    • Mike B says:

      As much as you might be loathe to hear it most executives actually do earn their pay. Some are crooked, some are ineffective, but most of those that actually make a career of leadership have a set of skills that most people don’t have. It is very very easy to sabotage a company through poor leadership. It is also difficult to succeed in a job where not taking risk is a recipe for failure, but taking the wrong risks is also a recipe for failure. The truth is that leaders so matter, just ask any professional sports team with a bad coach or general manager.

      Also, modern information technology has made ‘C’ level executive far more valuable because they can be directly responsible for more decisions than was possible prior to the 1980′s. Wherein a large mega-corporation like GM relied heavily on organizational unit managers back in the day, today the CEO is able to command the whole kit and kaboodle. All the pay that used to go to the Unit managers now accrues to the CEO. Look at Ford CEO Alan R. Mulally. He literally SAVED the company and prevented the loss of billions of dollars. Whatever the hell they are paying him it has been completely worth it. For the most part this isn’t some conspiracy where a bunch of privileged insiders have found a way to scam the system. We simply live in a world where executive leadership skills have come to have a great deal of value. Today’s large, highly complicated organizations simply wouldn’t function without them.

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      • aepxc says:

        It is indeed easy to destroy an organisation through poor leadership. It is however, all but impossible to drive an organisation to success through leadership alone. The farther one looks, the less detail one sees (and with lower certainty), and most of the value within the organisation is created through the detailed, day-to-day decisions. Since the people at the top are not in the best positions to make these decisions, much of effective leadership simply means passing authority down to the most appropriate level and not interfering with it from then on. In other words, a moderately successful CEO of a large corporation today is one that does not do much worse than a cardboard cutout of himself (or herself) would have done.

        CEOs receive high salaries because they can – because we consider it natural that the commander must be more ‘elite’ and receive more money than the people he or she commands. There is certainly a need for people who see and react to ‘the big picture’, but the ability to see the big picture is mostly a function of one’s position – it requires neither much toiling away, not some rare and unique talent.

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      • voxleo says:

        What of when the company is “saved” by carving a larger profit margin out of the quality of the goods produced and the safety of the employees working to produce them and the outright reduction of the labor force which you then replace with less effective and less expensive workers via automation and outsourcing?

        The products and services have declined in functionality and increased in price, are cheaply and wastefully produced with deliberately poor quality materials to encourage repurchase instead of repair (though we advertise the convenience of it being “disposable” without any thought as to the massive amounts of waste created by the disposed of or how toxic those remains might be to the environment or the functionality of the economy or society in general.) Almost all advancements and improvements have come on the back of technological innovation and refinement, but it feels like the value of goods and the value of people have declined in the process.

        I can’t be the only one who is infuriated by the psychotic greed that has replaced the value of democracy and freedom in this country. Its short sighted and cannibalistic and destined to end in rubble like such behavior has proven time after time throughout history to do.

        But the part that really baffles me is how can these people do it? How can they try to cut their own costs even further while so many will have to pay instead of them? I don’t care if I DID earn my billions through my considerable talents and skills which are so exquisite and rare to merit such rewards, I could simply not live with myself if I had the power to improve the living conditions of an entire country simply by having less excessive excesses. Say a small house instead of a mansion with more rooms than a hotel that my family of 5 lives in. Or do I really need to have that hundred thousand dollar slabs of 2000 year old stone shipped from Jerusalem to the custom built 30 room house just so that I can pave the walkway from my mansion to the guest house in JUST that color? (I’ve stood in such a place and felt physically nauseous contemplating the number of hungry people who could have been fed with the money spent on the rotating garage floor so that the owner would not have to deal with the chore of simply making it a through-port instead. OR heaven forbid actually just drive backwards a few yards out the driveway. )

        The love of money has done its work and I am distraught at the thought of how much worse it can get if this entire way of thinking isn’t changed fundamentally to value people over things and put life first.

        Hot debate. What do you think? Thumb up 16 Thumb down 18
      • Steve O says:

        I do not begrudge the CEOs per se for earning obscene amounts of money–I think their boards of directors are effectively stealing from stockholders, though. Malcolm Gladwell did an excellent New Yorker piece on how and why exactly top athletes, executives, attorneys, etc. earn so much. It was called “Talent Grab”, and I’m not sure how I got to it without being a New Yorker subscriber, but definitely find it and read it. It adds a lot of perspective to this discussion, and is a relatively unbiased view on what is fair at the top of the food chain.

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      • pshrnk says:

        SURVIVORSHIP BIAS. The characteristics of the CEO of a company that has done well must be the characteristics of a successful leader.

        Thumb up 3 Thumb down 0
    • rationalrevolution says:

      You know what, 500 years ago people said the same thing about royalty…

      If you think that executive compensation is a product of market forces you are the biggest fool on earth, I mean not only does that not even make sense fundamentally, but there are all kinds of documented facts which demonstrate that its not the case.

      See my post here: Income Inequality – the Heart of the Matter http://www.rationalrevolution.net/blog/index.blog?entry_id=2245334

      The big one is the recent study showing that executive compensation among the fortune 500 is set by boards at “above the market average” 95% of the time as a default, and that boards are stacked with friends and associates and the whole businesses of boards and executives in corporations is incestuous.

      Top executives aren’t “providing something of value”, they are insiders who went to school with ivy league friends who’s friends and relatives sit on boards of corporations that friends and relatives it on boards of, who play golf with board members of friends and relatives of board members, etc., etc.

      Explain the difference between the feudal system and what we have now. Seriously, do it. I assume that you would agree that the wealth of the nobility under the feudal system was “unearned”. Explain how our current system is different from the feudal system.

      “But, the answer is to put all the power into the hands of the stockholders. All of it. If they continue to make stupid decisions then, live with it.”

      Oh really? So if the stock holders decide to steal everything from the workers and give it all to the CEO that’s fine, as long as that’s what the stock holders want? Workers, the real value creators, have no rights and no say?

      Yeah, I’m sure you’ll come up with a rationalization for the WaMu executive who took home $20 million after 17 days “on the job”. I guess he just “created something” of more value in those 17 days than the average person would if they were to work for 400 years. I mean that is what you believe apparently, that the WaMu executive created $20 million, which is 400 times $50,000, in 17 days. So here is the question, if he didn’t create $20 million then where did it come from? And why do share holders have a right to take $20 million from whoever they had to take it from in order to give it to him?

      Every corporation is a pyramid scheme, figure it out…

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    • Paul Hoppe says:

      The abilities of academics don’t lack value. They’re just not easily monetized without going into the corporate sector.

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      • Pshrnk says:

        +1

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      • human mathematics says:

        Even going into “the corporate sector”, it’s not necessarily easy to monetise a professor’s skills. But that’s true of many (most?) people. Capitalist exchange makes certain value-adds (like real estate development) easier to monetise than others (like the trait of being a nice person).

        Thumb up 0 Thumb down 0
    • Kris says:

      The academics should produce something, build something, create something. Like Jamie Dimon. He helped create a deregulated banking and market system that required no responsibility and actually encouraged risky behavior. Then we all paid trillions of dollars for it, because we “value” that system that people like Jamie Dimon and Alan Greenspan and Phil Gramm helped create. Is that what you meant?

      Academics do create, build, and produce something of value. Then it gets developed and sold to consumers. The “power of the police state” that redistributed wealth (taxes) to fund DARPA, which in turn funded a research project that led to the creation of the internet is what now allows you to read this post and then comment on it. The internet has also created millions of jobs (and destroyed some too). There’s a whole lot more examples of how the awful American “police state” “stole” money from productive, creative, building citizens, redistributed it and invested it, and catalyzed American Ingenuity into the greatest economy on the planet. That is not “stealing,” sir. That is patriotic and reasonable investment.

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    • pshrnk says:

      Most people spend for the short run. Academics tend to produce benefits for the long run. Most of us do want the benefits academics provide, we just are not patient enough to spend (invest) accordingly.

      Thumb up 7 Thumb down 3
    • human mathematics says:

      K. Clark: A hidden assumption in your statement seems to be that being smart should have something to do with earning income.

      Thumb up 0 Thumb down 0
    • human mathematics says:

      Because you produce nothing anyone wants.

      This is not quite true. University administrators capture a significant fraction of university tuition fees. University education is something that people are willing to pay quite a lot for. So is (certain) academic research something that people value.

      I might look toward the “team effects” for a reason that corporate teams are more remunerative than academics. When I think of academics, I think of lone geniuses (some small teams) striving toward an uncertain goal. When I think of Bechtel, Procter & Gamble, Merck, Aetna, things are organised toward efficiently applying a formula that is known to make money. If there were several team members making sure academics profited from their efforts, they might earn more.

      Thumb up 0 Thumb down 0
  4. DaveyNC says:

    One of the reasons the evil rich/CEOs earn so much is that back in the ’70′s, Jimmah Cahter decided that there were too many people who made $1M in salary one year, so a new tax rate was instituted on incomes over $1M. It prompted the executive compensation specialists to develop other ways to compensate executives. What they came up with was our current system of bonuses and stock options. Even now, if you look at the salaries of the Fortune 500 CEO’s, you will see that most of their salaries are right around $1M per year, give or take, but by far the bulk of their compensation comes from bonuses and stock options. Note the base salary in this report on page 2: http://origin.library.constantcontact.com/download/get/file/1102561686275-61/GMI_CEOPay2011_122011.pdf

    So, Mr. Ayers, I imagine that they would like to be tossed into the briar patch once again. No telling what they would come up with.

    Hot debate. What do you think? Thumb up 10 Thumb down 12
    • human mathematics says:

      This kind of objection could be raised against any law: if we start sending cops to patrol this corner, they’ll just start dealing on another corner! It has to meet a limit somewhere.

      Thumb up 1 Thumb down 0
  5. rehajm says:

    While this is yet another slice and dice of the income distribution statistics, the intended implications are the same- that because we can show ‘growing’ inequality that, despite the top earners acting legally, fairly and justly, their income is still somehow unfair and unjust, and a central planning government needs to intervene through taxation to ‘restore’ balance. I would propose it would be better outcome for all actors involved to recognize and accept that in a global marketplace for labor skills and scarcity of skills matters. Then, concentrate instead on those factors that contriblute class/income mobilty and work to improve them.

    Hot debate. What do you think? Thumb up 28 Thumb down 27
    • Sam_L says:

      rehajm,

      Enron was legal, fair, and just? TARP money lent back to the government at a profit to subsidize bonuses was legal, fair, and just? Jon Corzine’s handling of MF global was legal, fair, and just?

      When the US government (through both parties) because complicit in handing out public dollars to private elite, we moved away from fair and just. And perhaps away from legal, although since the cronies are making the laws, they have found some ways to massage things there.

      There are a myriad of problems – not least of which are American’s no longer willing to put in an honest day’s work – but don’t pretend that corruption and complicity between the federal government and large corporations isn’t part of the problem.

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      • rehajm says:

        A false equivalency- You are equating all members of a particular income class with criminal behavior because you can name a company and an individual you believe to be associated with criminal behavior within that income class. Nice try, but we’re not buying it. BTW, Corzine has not been convicted of any wrongdoing as of yet- rule of law, at least for the time being, still exists.

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    • aepxc says:

      Acting legally, yes. But it is the “fairly and justly” part that is being debated. Are the highest income earners are compensated for their unique abilities to contribute to others (who then give the money to compensate them), or because they are best at fighting their way to the few legislated positions of privilege that are allowed to skim the cream off general economic flows?

      In other words, is a highly unequal income distribution the product of the free market or of rent-seeking?

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      • rehajm says:

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      • aepxc says:

        @rehajm, that is not the debate at all. The debate is whether membership in a given economic class is, for a significant portion of its members, predicated on particular traits of the socio-economic system in which they thrive. For instance, in medieval Europe, membership in the top economic class was predicated on inherited political power, membership in the top economic class of 19th Century Virginia was predicated on being a slave owner, and membership in the top economic class in modern Somalia is predicated on being a psychopathic warlord. In other words, the debate is not about whether every rich person is evil, but about whether the present socio-economic system is designed with sub-optimal economic efficiency, and sub-optimal ethical fairness.

        Or do you believe that we happen to be living during the exact time and place in history at which we have finally figured out the perfect economic system, and there will be no further significant progress in this regard in the millennia to come?

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  6. rationalrevolution says:

    *Sigh* so wrong…

    #1 It’s not simply about the dollar amount of income, its also about HOW the income is derived. Is it capital gains income or wages? I’d say that someone with $100,000 a year in capital gains income “is rich”, yet I’d also say that someone with $100,000 a year in wage income is middle-class.

    But look at what you do, you keep talking about “earning”: “The rise is due to the simple fact that our richest Americans in real terms were earning much more money.”

    Err… no, they aren’t “EARNING” more, what has happened is that there has been a massive redistribution of wealth and income from the working class to the capital owners.

    Here is my question: Do so many people really have no understanding of capitalism anymore or do you guys intentionally obfuscate the issue?

    Here is the truth about income inequality: There are TWO forms of income inequality: natural inequality and engineered inequality. To claim that all inequality is natural or that the only form of inequality is natural is to expose yourself as an obvious apologist of thieves.

    Look, if you live in a neighborhood where one person (Johnny) goes around robbing houses every night and that person becomes the richest person in the neighborhood, simply saying “Ahh well there will always be inequality. The fact that Johnny is richer than everyone else is nothing we should worry about or be upset over. The fact that’s he’s richer than us does us no harm…, black, blah, blah….”

    This is what you folks and all of the inequality apologists try to do, you try to pretend that we are all too stupid to understand that ummm… yeah, there are cases where the wealth of some is a product of theft from others.

    Here is a fact: The super-rich aren’t “earning” more money today than they did 30 years ago, they are stealing it all. Rather, they’ve engineered a system of massive “legal” redistribution, and over the past 30 years a larger and larger portion of the value created by workers around the world is being redistributed to the super-rich through capital ownership.

    This is totally obvious of course. Capital ownership has become increasing consolidated over the past 30 years, that’s a fact. The rise in incomes of the super-rich is a product of capital ownership consolidation, not of some small segment of the population becoming exponentially more productive. Capital has become consolidated and capital owners are getting a larger and larger cut of all value produced. That’s what’s happening, its obvious.

    Yes, there is natural inequality, some people are naturally more capable, intelligent, hard working, and productive than others. However, the truth is that the “best” people are only naturally 2 to 5 times more capable or productive than average, so this doesn’t account for situations where individuals have incomes hundreds of thousands of times greater than the average. No one is exponentially smarter, stronger, faster, or harder working than the average. If the average person works 40 hours a week, no one is working 40,000,000 hours a week obviously…

    If the average person can chop down 5 trees in a day, a really productive person may be able to chop down 10 trees in a day, heck maybe even 15, but they aren’t going to be able to chop down 500,000 trees in a day. Yet when we look at the income differences between someone like John Paulson and the average American worker, that’s the kind of income differences that we see.

    Those income differences are not a product of John Paulson creating 100,000 times more value than the average person, they are a product of billions of dollars of value created by average workers being redistributed to John Paulson, and yes, that means that we all have an interest in putting an end to his theft.

    Calls to accept the levels of economic inequality we see in America today are akin to saying “We’ll always have thieves, so just live with it and let people steal from you.”

    The super-rich ARE THIEVES, their incomes are NOT a product of value created by them, they are products of value created by everyone else (the working class). This has always been true and is remains true today. Exponential wealth concentration HAS ALWAYS BEEN AND ALWAYS WILL BE a product of exploitation. It was true of the Egyptians, true in Imperial China, true in feudal Europe, and it remains true today. The big lie is that the rise of democratic market economies” somehow magically changed all this, but of course it never did, think about how idiotic it is to believe that!

    Hot debate. What do you think? Thumb up 40 Thumb down 44
    • JBP says:

      No, the rich are not thieves.

      But many are opportunists who profit mightily from progressive government program. Do you know how most of the wealth is transferred from the lower classes to the rich? By inflation. Inflation transfers wealth from those without investments to those with investments—with bankers being an exception. Now which class of people do you suppose have a lot of investments?

      What causes inflation? Monetary expansion—this is simple supply and demand. What is the biggest cause of monetary expansion? The deficit. Debt increases the money supply. The biggest cause of the deficit is social programs.

      Sure, you can raise taxes on the rich. And assuming they don’t change their tax planning, you can raise enough money to fund the deficit for maybe two months. Now what?

      Another factor that favors the rich is the massive increase in government regulations. The fact remains that regulations always contain loopholes. It is unavoidable. Now, who do you suppose is going to be able to take advantage of these loopholes? How about someone who can pay a tax lawyer $10,000 to set up a tax shelter? Society needs some rules, but when the rules get too complicated, those with resources are the ones who can afford to hire people to navigate the system.

      Regulation favors the rich.

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      • rationalrevolution says:

        You’re somewhat confused, but a little bit right. Inflation favors borrowers and hurts savers. But inflation has been low for the past 20 years, basically since the big end of stagflation in the early 80s, so really inflation has little to do with anything. Actually right now we would be better off with higher inflation to devalue debts.

        The biggest cause of the deficit is not “social programs”, whatever that means. The biggest cause of the deficit is not bringing in as much revenue as is spent, duh. The biggest components of the nation’s debt aren’t even government, its the financial sector and businesses:

        http://en.wikipedia.org/wiki/File:Components-of-total-US-debt.jpg

        Of government debt, you can’t assign it to any specific program. If you are talking about the federal budget, the majority of federal spending does not go to “social programs”:

        http://en.wikipedia.org/wiki/United_States_federal_budget

        “Defense spending” accounts for 20% of the budget, but really total military spending is almost 30% of the budget if you count other military spending that doesn’t fall under the defense department plus the interest on debt as a result of the unpaid for wars.

        Social Security is 20% of the budget, but this has never incurred any debt, indeed the Social Security program is a massive creditor to the general fund to the tune of $2.5 trillion.

        At any rate, its irrelevant, because inflation isn’t the issue.

        “Do you know how most of the wealth is transferred from the lower classes to the rich?”

        Yeah, via profits, duh. Let’s see, over the past century profits have consistently outpaced inflation. Take a look:

        http://observationsandnotes.blogspot.com/2011/03/stock-market-100-year-inflation-history.html

        “Regulation favors the rich.”

        Yes this is true, generally speaking, though not always. It’s also the case that a large part of the economic regulations in America have been put into place at the request of the rich and powerful, which is no surprise.

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      • JBP says:

        Reply to rationalrevolution:

        You cannot dismiss inflation’s effects by blithely asserting it is low. What does low mean? Even a modest 2 or 3 percent inflation can cause the value of someone’s money to be cut in half in 25 years. This is the mathematical effect of compounding, which is very powerful. The 20th and 21st centuries have significantly more inflation than the 19th centuries, so inflation is high compared to the 19th centuries. Actually, the 19 century was mildly deflationary. An average item that would have cost $100 in 1800 would have cost about $50 in 1900, but the average item that would have cost $100 in 1900 would have cost about $2,100 in 2000. When looked at over the long run, modern rates or much higher.

        Now what changed after 1900? Did businesses not have debt before that? What policies changed?

        Yes, inflation helps borrowers and hurts savers, but that is not the effect I am discussing. If I own investments, inflation increases the value of my investments. Where does that value come from?

        Also, government debt is not analogous to business and financial sector debt. Most of the time, the business is using the debt to create value. For example, a home builder takes out $200,000 in debt to build a home. This increases the money supply by $200,000, but it also increases the supply of goods by more than $200,000. (The builder cannot make a profit if the home is only worth $200,000 dollars or less.) Therefore, the home builder has increased the money supply, but the builder also increased the things money can buy by a greater amount. Therefore, the builder’s actions are mildly deflationary.

        The government, on the other hand, does not use much of its money to create things. In some cases such as national parks, it arguably does. But social programs and the military do not by and large increase the value of goods and services. And in some cases, business debt is blown or fails to create value. Personal private debt is a mixture, but sure a huge chunk of it is blown.

        Why didn’t you mention government spending levels on government-subsidized health care or welfare programs? Is it because each one is larger than defense spending? By your own calculations defense is less than a third of the budget. Therefore, social programs are the “biggest cause” just like I wrote.

        So most of your reply about inflation is not responsive to my main points.

        Finally, yes, I expect that the rich probably influence regulations more than other classes, but you have not given me an factual reason to believe that this is a significant factor in the decision making or whether it is dwarfed by the loophole phenomena. If the rich had the type of influence you seem to believe they have, then why do they pay more taxes then the rest of us? Why do they get stuck with the alternate min tax? Why do they lose their deductions? I have been a party to the creation of these regulations many times and my observations do not lead me to believe the rich are creating or unduly influencing the creation of regulations. On the other hand, I have observed them taking advantage of loopholes many, many times.

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    • Dave says:

      You’re forgetting how technology allows people to be more productive. Using your analogy, if I develop a machine to chop down trees (and even produce multiple machines), I can definitely chop down 500,000 trees in a day. If someone is still using an ax, they may be stuck at 5. Would it be my fault for the other person still using an ax? Does that make me a thief?

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      • rationalrevolution says:

        The super-rich are, generally speaking, the OWNERS of technology, not the creators or users of it. Bill Gates didn’t write DOS, he didn’t write Windows. Warren Buffet didn’t create any technology. Steve Jobs didn’t invent a damned thing, he was a salesman (who got his name o a bunch of patents as a “co-author”).

        It’s really very simple. The reason out system is called CAPITALISM is because its a system where all rights to newly created value are a product of CAPITAL OWNERSHIP. The incomes of the super-rich are a product of increasing property ownership, not of increasing individual productivity.

        Again, our economic system is simply post-industrial feudalism. The incomes of the rich are a product of owning property that workers use to create value.

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      • Jack Skellington, ESQ says:

        —You’re forgetting how technology allows people to be more productive. Using your analogy, if I develop a machine to chop down trees (and even produce multiple machines), I can definitely chop down 500,000 trees in a day. If someone is still using an ax, they may be stuck at 5. Would it be my fault for the other person still using an ax? Does that make me a thief?—

        No, it wouldn’t make you a thief. It would make you a character in a children’s fantasy novel, though. The current system isn’t a meritocracy. It’s idiotic to present tautological arguments that begin with the concept that the most productive end up with the most assets. Debating the utopian world of public policy is a nice hobby, but useless in the actual world.

        If income distribution matched skill distribution, there would be a broad middle class surrounded by outlying cases of poverty and high wealth. That’s clearly, inarguably, not the case. The influence that wealth offers builds a self perpetuating system of insulation and one way transfer of additional wealth to those who wield the influence.

        Let’s build a more realistic example, shall we?

        I’m born into a wealthy family and inherit a controlling interest in a tree chopping corporation. If someone designs a machine that chops down 20 times as many trees in a given day, and that person works for me chopping down trees, when I sue them over the intellectual property because it was developed while they worked for me and acquire the rights to it because I can afford better lawyers to argue the laws I’ve had my lobbying groups draft, and then use that technology to hire lower skilled workers. Am I a thief then?

        Because that story happens daily. The myth of the hero inventor who rises to wealth and power almost never does.

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      • JBP says:

        Reply to Jack Skellington,

        Bill Gates and Steve Jobs.

        Seriously? You live in the fantasy land. Neither Bill Gates nor Steve Jobs were rich when they started their companies. Here is Steve Jobs house where he started Apple: http://en.wikipedia.org/wiki/File:Apple_Garage.jpg

        I am willing to agree that pure blind luck has as much to do with success as merit, but this country has a great deal of economic mobility. If your theory was correct this would not be true. IBM did not sue Bill Gates and steal DOS nor did they sue Steve Jobs and steal Apple. Both companies displaced what at the time was considered the titan of the industry. IBM outsourced DOS because it thought it wasn’t worth the time. They were wrong and now they are dwarfed by Windows and Apple.

        Here is a pretty good report on income mobility: http://www.treasury.gov/resource-center/tax-policy/Documents/incomemobilitystudy03-08revise.pdf

        Here are some of its finding:
        There was considerable income mobility of individuals in the U.S. economy during the 1996 through 2005 period as over half of taxpayers moved to a different income quintile over this period.

        Roughly half of taxpayers who began in the bottom income quintile in 1996 moved up to a higher income group by 2005.

        Among those with the very highest incomes in 1996 – the top 1/100 of 1 percent – only 25 percent remained in this group in 2005. Moreover, the median real income of these taxpayers declined over this period.

        Thumb up 0 Thumb down 0
      • Jack Skellington, ESQ says:

        —-Reply to Jack Skellington,

        Bill Gates and Steve Jobs.

        Seriously?—-

        Yes, seriously. 2 out of 6 Billion people is your response to “disprove” that something nearly never happens?

        Paris Hilton, Kim Kardashian, George W Bush.

        Hey, that’s three. Checkmate, I guess!

        —–You live in the fantasy land. Neither Bill Gates nor Steve Jobs were rich when they started their companies. Here is Steve Jobs house where he started Apple: http://en.wikipedia.org/wiki/File:Apple_Garage.jpg

        I am willing to agree that pure blind luck has as much to do with success as merit, but this country has a great deal of economic mobility.—-

        This is not true. Sociol-economic class is fairly static. By FAR the highest correlation to total lifetime earnings of an individual is which class they are BORN into. Higher than IQ, higher than race, higher than education level. You get the idea.

        —- If your theory was correct this would not be true. IBM did not sue Bill Gates and steal DOS nor did they sue Steve Jobs and steal Apple. Both companies displaced what at the time was considered the titan of the industry. IBM outsourced DOS because it thought it wasn’t worth the time. They were wrong and now they are dwarfed by Windows and Apple.

        Here is a pretty good report on income mobility: http://www.treasury.gov/resource-center/tax-policy/Documents/incomemobilitystudy03-08revise.pdf

        Here are some of its finding:
        There was considerable income mobility of individuals in the U.S. economy during the 1996 through 2005 period as over half of taxpayers moved to a different income quintile over this period.

        Roughly half of taxpayers who began in the bottom income quintile in 1996 moved up to a higher income group by 2005.

        Among those with the very highest incomes in 1996 – the top 1/100 of 1 percent – only 25 percent remained in this group in 2005. Moreover, the median real income of these taxpayers declined over this period.—-

        Great, good idea to bring data.

        Unfortunately, the paper in question is fairly useless when applied to the case of merit vs starting class as it doesn’t qualify starting class. It’s interesting that there’s a 1 in 500 chance of moving from the lowest quintile to the top 1%. I’m not sure I’d call it encouraging, but certainly it offers some counter-factual examples to the idea that there’s complete stratification between classes. Unfortunately the interesting data, relative wages of the generation BEFORE the one showing mobility is missing. Are the .2% that move across the spectrum born into relative poverty? No way to say. They may be born into higher quintiles and “regress to the mean” so to speak. They may all be born into abject hand to mouth poverty and live in foster homes as children.

        It’d be interesting to know.

        Here’s a chart from a study I find a little more on point (though likely equally biased) showing generational wage *elasticity*. Which is the more important point, I think.

        http://www.economicmobility.org/assets/img/EMP_US_Canada_Fig1.jpg

        Generational wage elasticity for the US when compared to other first world nations is poor. I’m well aware of the astonishing number of variables, here. Countries that do “better” are almost definitionaly smaller and more homogenous demographically, etc. No mention of absolute income is made, perhaps there is great elasticity because the total range is smaller, etc.

        I think it speaks to the main idea, however, fairly cleanly. Both as a matter of perception and statistics, class in the US is determined by birth more than most first world nations, and not by a small margin.

        At any rate, I’m not sure that data that indicates that starting with wages in the lowest 1/5 more likely than not indicates ending with wages in the lowest 1/5. I’m not sure what it says about the merit going to money argument, but it’s hard to see it as positive.

        Unless, I suppose, if the theory is that the poor deserve, by and large, to be so. Which is another argument entirely, fairly easily disproved in my opinion.

        Thumb up 5 Thumb down 2
      • JBP says:

        Reply to Jack Skellington,

        Yes, seriously. 2 out of 6 Billion people is your response to “disprove” that something nearly never happens?

        If your point is that its rare for people to gain the amount of wealth that people rarely gain, then your point is a trivial tautology. Yes, I agree, only 1% of the people can be the top 1% of wealth earners. What does that prove?

        I thought we were discussing mobility and whether the rich are thieves or have rigged the economic game. The top ten wealthiest people in America:

        Bill Gates is self made.
        Warren Buffett is self made.
        Larry Ellison is self made.
        Charles Koch & David Koch this is arguable, but their grandfather was an immigrant settler and the company they inherited was middling sized until they turned it into what it is today.
        The three Waltons inherited, but then again, they inherited a fortune from their father who was self made.
        George Soros is self made.
        Sheldon Adelson is self made.

        So there are the top ten richest people and half of them are self made. In addition, none of their families were wealthy two generations ago.

        This is not true. Sociol-economic class is fairly static. By FAR the highest correlation to total lifetime earnings of an individual is which class they are BORN into. Higher than IQ, higher than race, higher than education level. You get the idea.

        Yes, the highest correlation to lifetime earning of an individual is class, but it is estimated at .25 to .5, which means that even if you take the highest number it is only half. Of course, your correlation includes IQ as one parameter. Smart parents tend to have smarter children and socially adept parents (which is a better predictor of success than smarts) tend to have socially adept children. And the children of the rich will have all the benefits of the best education.

        Therefore, your thesis that the rich are most likely thieves or have rigged the game is not proven merely by citing this correlation. It encompasses a lot of things besides thievery and game rigging.

        Unfortunately, the paper in question is fairly useless when applied to the case of merit vs starting class as it doesn’t qualify starting class.

        Yes it does. For example, over the ten years studied, 3.6 percent of the people in the lowest quartile made it to the highest quartile and 6.9 percent made it to the next highest quartile. And in fact, most of them made it out of the bottom quartile.

        As for wage elasticity, again there are a lot of variables that are not related to thievery or rigging the game.

        Unless, I suppose, if the theory is that the poor deserve, by and large, to be so. Which is another argument entirely, fairly easily disproved in my opinion.

        Nice straw man. Yes, many of the poor are held down by drug or alcohol problems, which is a serious problem for mobility, but such a sweeping generalization is silly.

        Thumb up 1 Thumb down 2
    • Steve O says:

      So Kobe Bryant and Peyton Manning are thieves? Bill Gates and Steve Jobs are thieves? George Clooney and Brad Pitt are thieves?

      CEOs are probably paid more than they’re worth (we’ll say 20 times too much, for the sake of argument), but the bottom line is it really isn’t hurting you all that much. You seem to have some good thoughts, but your “Manifesto” is built upon a bit of exaggeration.

      Thumb up 3 Thumb down 2
    • Kris says:

      I’m not trolling, I just want to point out that I didn’t read your post because it started out with a pretentious “sigh”, followed by a “so wrong”.

      I’ve read enough internet comments to know better than to read yours, but thanks for putting that sentence first. saves time.

      Thumb up 5 Thumb down 2
  7. Mike B says:

    While there will always be rich and poor, if the former does not at least make some modest effort to improve the lives of the latter there may be temporary periods where the number of rich may plummet dramatically due to the dual factors of needing spending a large part of their fortunes on security services and, when that proves insufficient, by being killed.

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  8. Brian says:

    You lost me at “cri de coeur” …. when your discussion begins with a phrase that let’s say, only “1%” of people might understand – well, that is when I know the rest of the piece will be filled with high minded, self important babble.

    I love Freakonomics. I have learned more here about how econmics works in the real world than my college classes. But this is nothing more than – dare I say it – class warfare.

    Keep tilting at those windmills!

    Hot debate. What do you think? Thumb up 23 Thumb down 24
    • Kris says:

      Here’s a tip: Next time you come across a phrase you don’t understand, highlight, copy, paste in the Google search field, press enter. You’ll be part of the 1% in no time. #FirstWorldProblems

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