POLITICS: PennAve

How the top 0.1 percent inflates the 1 percent

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Treasury,PennAve,Joseph Lawler,Economy,Technology,Income Inequality

The top 1 percent of U.S. earners have roughly doubled their share of income over the past 30 years, from 10 to 20 percent.

But few Americans understand what's behind the rise of the 1 percent.

The short answer is: The 0.1 percent. Their share of U.S. income has tripled from roughly 2 percent in 1979 to 6 percent in 2012, with average earnings and capital gains of $3.6 million. The higher up the income distribution, the faster incomes are growing.

As for what the 0.1 percent are doing to get richer, the answer lies in retail, technology and especially finance.

Those industries were better represented in the Forbes 400 list of U.S. billionaires in the early 2000s than they were in the late 1970s, University of Chicago economist Steve Kaplan discovered. The Forbes 400 measures wealth, not income, but it’s possible to identify trends in earning by analyzing changes in the list.

Income gains in the financial industry are unmistakable. The proportion of the top 0.1 percent of earners working in finance grew dramatically between 1979 and 2005, rising from 11 percent to 18 percent, according to Jon Bakija, a professor at Williams College who worked with a researcher within the Treasury Department to examine confidential tax-return data that includes information about occupations.

Anecdotal evidence also points to the role of finance in boosting the wealthy. David Tepper, founder of Appaloosa Management, reportedly earned more than $3 billion in 2013. The hedge fund industry landed a record $312 billion in investment gains in 2013.

CEOs have done well, but not compared with the biggest hedge fund managers. “In each year since 2004, the 25 highest paid hedge fund managers have earned more than all of the chief executive officers of the Standard and Poor’s 500 companies combined,” Kaplan writes.

Kaplan told the Washington Examiner that one suggestive development is that “it was the educated upper-middle class people ... who rocketed into the Forbes 400.” He cited Facebook CEO Mark Zuckerberg as an example of the type of top performer who has swelled the ranks of the super-rich over the past 30 years. The share of the billionaires from modest backgrounds remained constant, while the portion of those who inherited wealth has declined. But innovators from stable economic backgrounds, such as tech moguls like Zuckerberg or new retailers like Amazon's Jeff Bezos, are able to reap rewards that might not have been attainable in past eras.

More broadly, the rise of the top 1 percent is driven by access to people across the globe , Kaplan suspects. Technology and globalization have allowed the top performers in a given field to reach more customers or clients – or to make more and bigger investments, in the case of finance – greatly increasing the maximum they can earn.

Others in the 1 percent who are not exposed to technology and globalization have not experienced the explosive gains that tech and finance have. That category includes doctors, Bakija said. “Technology makes doctors more effective,” he explained, but doesn’t allow them to “serve 100 times as many patients” as before.

An alternative explanation, suggested by Emmanuel Saez, the Berkeley economist whose landmark study of IRS data is the source of the statistics relating to the 1 percent, is that tax cuts and other government policies have enriched only a few a the top. The lower rates for high earners since the Reagan era may have given 1 percenters a greater incentive to boost their own incomes to an extent not seen since the Gilded Age. In those days, social attitude toward the very wealthy were evident in their appellations: "robber barons" or, in the words of Teddy Roosevelt, "malefactors of great wealth."

One complication for understanding the 1 percent is that the rise in top incomes in the U.S. has not shown up as dramatically in some other industrialized countries, such as Sweden or Japan. Saez cites those differences as evidence that America’s relatively steep tax cuts are behind the 1 percent’s success. Kaplan attributes them instead to those countries being “probably culturally different” and not as innovative as the U.S.

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