New York Times and Piketty show that rich people are the most energetic?
“Our Broken Economy, in One Simple Chart” (nytimes) shows that the highest-income Americans are also the ones with the “largest income growth.” I wonder if Thomas Piketty and friends followed individuals over time or just looked at brackets of income that contained different people from year to year. If they followed individuals then these data suggest that the most energetic and motivated Americans are the richest. Instead of slacking off and enjoying their yachts, Gulfstreams, and 7 luxury homes worldwide, they are doing something that gives them a 6% pay raise every year.
If they didn’t follow individuals, though, aren’t the stated conclusions wrong? Suppose that the income of rich people is highly variable, e.g., inflated one year due to selling a company and comparatively depressed the next year. In that case, from simple volatility and economic growth you might see that the high end of the income scale was doing well (how else did those people get to the high end of the scale?) but it wouldn’t be the same people year after year. Similarly, for those with low income, someone who goes onto a diet of SSDI and OxyContin might have the same income as last year’s consumer of SSDI/OxyContin.
[Separately, the chart note suggests that it includes “transfers and non-cash benefits” for the poor, but I wonder how that is possible. Ever since the Clinton-era “welfare reform,” simple cash transfers have been a small component of modern-day welfare in the U.S. The non-cash stuff is tough to track and value. When a new apartment building is constructed, for example, the developer may be required to hand over 10 percent of the units to a government housing ministry for distribution to the poor. The value of these units are not on the government’s books. And if real estate prices go up, does the person who lives in a free apartment in Manhattan experience a boost in income according to Piketty and friends? Collecting child support and alimony is a big part of the U.S. economy and there are no convenient authoritative sources for the total cashflow (generally from higher-income defendants to plaintiffs with lower wage income).]
The article came to me from a hedge fund manager friend:
First, there has always been a distribution of income and we know it is skewed right. It pretty much has to be, if income is bounded by 0 but not limited on the upside. Allowing for negative income tax rates (the earned income credit) creates some weird growth rates. Overall, growth rates are compressed for people receiving income-based transfers when those transfers are progressive.
There is a tautological aspect to the results. People whose income rose the fastest (e.g. Steve Jobs) ended up in the 1% or the 0.1% because of that growth. So it shouldn’t be surprising that people who now have the highest incomes also had faster rates of growth in that income. That is how they got into the right tail. Few people complain when Steve Jobs or Mark Zuckerberg leapfrogs into the high income brackets but it really bothers economists like Thomas Piketty that the averages behave different from the averages of other income brackets. Remember, we are measuring how fast the average moved, not how fast the income of a third-generation trust baby’s income rose over that period. Their income may have determined the average in 1980 but they are not part of the tiny super-high income brackets any more. Those brackets are reserved for people who grabbed the brass ring and held on for a meteoric rise in pay.
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