Selling stocks makes you richer (even if you buy them back)
According to NPR. Unfortunately there is no link for radio stories, but this morning they summarized a Saez study by saying it claimed that America’s richest got much “wealthier” in 2012 by selling stocks ahead of the tax increases. Seriously.
Here is the BBC, in a somewhat less embarrassing version of the story:
The income gap between the richest 1% of Americans and the other 99% widened to a record margin in 2012, according to an analysis of tax filings.
The top 1% of US earners collected 19.3% of household income, breaking a record previously set in 1927.
Income inequality in the US has been growing for almost three decades.
Overall, the pre-tax incomes of the top 1% of households rose 19.6% compared to a 1% increase for the rest of Americans.
And the top 10% of richest households represented just under half of all income in the year, according to the analysis.
Emmanuel Saez at the University of California, Berkeley, one of the economists who analysed the tax data, said the rise may have been in part because of sales of stock to avoid higher capital gains taxes in January.
As I keep saying, income inequality data is basically meaningless, regardless of whether you include cap gains or not. Economists should focus on economic inequality, which is best measured by consumption inequality. The data there looks far better. That’s not to say there isn’t room for improvement. Economic deregulation (removing barriers to entry from professions) and weakening intellectual property rights laws would helps improve economic inequality. One of the main causes of growing income inequality is the movement from high MC production (coal, steel, cars, toasters) to ultra low MC production (Facebook, Microsoft, Apple, Google, eBay, pharmaceuticals, etc). The big gains get shared by the techies and the finance industry that spots the winners and funds them.
And don’t forget that America has lots and lots of problems that are much more pressing than “inequality.” That’s where policy reform should be focused.
Tags:
11. September 2013 at 08:03
“Economic deregulation (removing barriers to entry from professions)…”
It’s nice to see this mentioned. Taxi licensing is a prime example of how regulations advertised as consumer protections wind up forming a cabal of entrenched producers.
11. September 2013 at 08:37
Let’s see…
The software, Internet services and pharma sectors, together, explain most of the growth in inequality since 1980.
And the 8% of gdp that is financial sector earnings is mostly derived from spotting these low-MC ‘winners’.
Well, glad that’s settled.
11. September 2013 at 08:47
Removing mandatory licensing is something that pretty much everyone that has some understanding of economics should be in favor of, regardless of their political leanings. If an association wants to provide a certification, they are free to do so, and the consumer can pay attention to those things or not. Nothing forces me to trust someone’s ebay reputation, or the reviews on yelp either.
11. September 2013 at 08:50
I want to measure the justice of economic inequality on Invention Rate and Time Scale….
How many inventions come to market in X time? And how long does it take non-branded premium consumption goods to become available to middle and lower class?
The most just system being the one that achieved best mix of most new inventions and time to disbursement.
—-
It’d be even better if you econos did some kind of index thing that measured the value of the original premium price in today’s dollars, when it intro’d to the market, and reflected that value once everyone has it.
As in the $50K 60″ TV from 10 years ago, has put $49K in every American buyer’s pocket in value as the price has fallen.
This isn’t CPI, this is purely product category specific to capture on their won the product categories that see massive price deflation.
Taken these measures together, would serve to clearly price the Cash Value Equivalent the masses get in just X short years of waiting.
The reality is that society traded away wage increases for the masses to make sure even the poorest have the bandwidth that 15 years ago, not even the biggest corporations could afford.
They should be reminded in dollar amount by economists, what that trade bought them.
Lastly, a question:
If we gave 300M Americans a free $200K Harvard Education online (nationalized it and put it in a MOOC that truly ruined signalling)
How do we measure that $60T in value, while GDP plummets?
11. September 2013 at 08:52
I commented on the latest Saez numbers at Economist’s View and explained very clearly why for historical comparisons one should only look at his data series excluding capital gains (capital gains are not “income”, and are not part of GDP; it’s highly volatile since it’s influenced by asset prices and tax levels and changes; it’s realized by different households at different times; etc.).
As it turns out the results excluding capital gains broke far more records than the series including capital gains.
1) The top 10% income share was 48.16% in 2012, the third all time record set in a row for this category. This compares to 31.38% in 1953.
2) The top 5% income share was 35.76% in 2012, breaking the previous all time record of 34.77% set in 1928. This compares to 20.37% in 1972.
3) The top 1% income share was 19.34% in 2012, the highest since 1928 when it was 19.60%. This compares to 7.74% in 1973.
4) The top 0.5% income share was 15.16% in 2012, the highest since 1916 when it was 15.60%. This compares to 5.07% in 1973.
5) The top 0.1% income share was 8.82% in 2012, the highest since 1916 when it was 9.87%. This compares to 1.89% in 1973.
6) The top 0.01% income share was 4.08%, the highest since 1916 when it was 4.40%. This compares to 0.50% in 1973.
Those trying to exagerate income concentration missed all of this.
P.S. Of couse this is all irrelevant to you Scott since you think consumption is far more meaningful. I just thought I’d mention what everyone is missing.
11. September 2013 at 09:24
Income is not wealth!
Wealth is a store of money, property, value or resources — stuff.
Income is a flow of payments for goods or services.
Having a high income may provide the conditions to build wealth. But, someone is not rich just because they are highly paid.
11. September 2013 at 09:28
Doug M,
So income is not wealth. Hmmm, are you ready to dismantle GDP?
11. September 2013 at 09:36
Mark, can you give me the top 20%?
Once again we see the Hegemony is not the top 1%
We see it is the top 20%.
The game is three player:
A: The 33%+ who spend part of their earning life in the Top 20% – they have money and votes.
B: top .1%-1% – they have money but not as much as A.
C Everybody else. They got votes, and no money.
——
Everything in America is wrong because the C players play as if they are in a two player game. See China in Cold War.
11. September 2013 at 09:42
Morgan Warstler,
“Mark, can you give me the top 20%?”
No, it’s not part of Saez’s data.
11. September 2013 at 09:44
Becky Hargrove,
GDP is a measure of output. GDP is not a measure of wealth.
The wealth of a country would include mineral resources still in the ground, acreage of arable farmland, its forests, its factories, and its workforce.
11. September 2013 at 09:49
Happy 9-11 (No, not that one). Buy an anniversary present for your favorite Marxist;
http://www.amazon.com/Painful-Birth-Became-Prosperous-Society/dp/0761859993/ref=sr_1_4?s=books&ie=UTF8&qid=1370884609&sr=1-4&keywords=painful+birth
You’ll have fun watching them become apoplectic.
11. September 2013 at 09:53
“One of the main causes of growing income inequality is the movement from high MC production (coal, steel, cars, toasters) to ultra low MC production (Facebook, Microsoft, Apple, Google, eBay, pharmaceuticals, etc). The big gains get shared by the techies and the finance industry that spots the winners and funds them.”
Could you elaborate on this please?
11. September 2013 at 09:58
Consumption inequality has closely followed income inequality. Conservatives are going to have to get a new talking point to fall back on.
http://www.nber.org/papers/w16807.pdf?new_window=1
11. September 2013 at 10:10
Another one that concludes:
“In this paper, we have documented thoroughly that the increase in income inequality was matched by an increase in consumption inequality of comparable magnitude.”
http://www.ppge.ufrgs.br/sabino/ecod03/bibl/nber%2022.pdf
11. September 2013 at 10:36
Anon, You said;
“The software, Internet services and pharma sectors, together, explain most of the growth in inequality since 1980.
And the 8% of gdp that is financial sector earnings is mostly derived from spotting these low-MC ‘winners’.”
I hope you don’t really believe that. I always thought you were a sensible commenter.
Thanks Mark.
Edward. Low MC industries tend to be “winner-take all” whereas high MC industries have a more even wage gradient.
Joe, If income data is unreliable, how can we trust income minus savings data? I’ve seen lots of studies that suggest consumption inequality is not increasing sharply, which matches what I see when I look around. Compared to the 1960s, the consumption levels of the poor seem to have risen much more than the middle class.
And Will Wilkinson directed me to this paper (by Jonathan Heatchote, Fabrizio Perri, and Giovanni Violente):
“First, consistent with basic economic theory, consumption inequality is substantially lower than income inequality. Second, the rise in consumption inequality is much smaller than the rise in disposable income inequality.”
http://www.fperri.net/PAPERS/redusa.pdf
Also the consumption data is distorted by the fact that the cost of living has risen faster for the rich than the poor.
And BTW, I’m not a conservative. And I support income redistribution.
11. September 2013 at 11:02
Scott – What are your thoughts on consumption vs insurance as the main benefits of wealth? I had been basically in agreement with you on the topic of consumption inequality, but then Steve Waldman definitely opened my eyes with his post here. Consumption is great, but the security of knowing that you’ll have future consumption is quite valuable.
11. September 2013 at 11:38
Scott, that paper takes into account how financial markets, which is predominantly debt instruments, play a role in smoothing out consumption inequality. Not sure that really supports your position. As short term consumption financed by debt improves current consumption at the expense of future consumption. Which seems to have happened post 2006 (last year of data in the paper you cite)
“our estimates suggest that a signiï¬cant portion of the change in wage volatility was transitory in nature, and hence
easily insurable through saving”….except that most American’s savings decreased during this time and debt expanded, a lot. The main mechanism for consumption smoothing didn’t happen – savings.
Instead we got expenditure cascades.
http://en.wikipedia.org/wiki/Expenditure_cascades
11. September 2013 at 11:40
I should have said “current” as opposed to “short term” consumption.
11. September 2013 at 13:56
Let’s not forget the analysis of Robert Gordon — of CBO, NBER, the Boskin Commission, the popular textbook, etc. — hardly a right-wing apologist:
http://www.nber.org/papers/w15351
“The rise in American inequality has been exaggerated both in magnitude and timing … This paper shows that a conceptually consistent measure of this growth gap over 1979 to 2007 is only one-tenth of the conventional measure. Further, the timing of the rise of inequality is often misunderstood.
“By some measures inequality stopped growing after 2000 and by others inequality has not grown since 1993. This cessation of inequality’s secular rise in 2000 is evident from the growth of Census mean vs. median income, and in the income share of the top one percent of the income distribution. The income share of the 91st to 95th percentile has not increased since 1983, and the income ratio of the 90th to 10th percentile has barely increased since 1986. Further, despite a transient decline in labor’s income share in 2000-06, by mid-2009 labor’s share had returned virtually to the same value as in 1983, 1991, and 2001…
“Directly supporting our theme of prior exaggeration of the rise of inequality is new research showing that price indexes for the poor rise more slowly than for the rich, causing most empirical measures of inequality to overstate the growth of real income of the rich vs. the poor. Further, as much as two-thirds of the post-1980 increase in the college wage premium disappears when allowance is made for the faster rise in the cost of living in cities where the college educated congregate…”
11. September 2013 at 14:10
“Economists should focus on economic inequality, which is best measured by consumption inequality.”
I think it is insightful. We start our economics by looking at utilities. We produce because we eventually consume. Then the problem really lies in consumption.
11. September 2013 at 14:14
“Economists should focus on economic inequality, which is best measured by consumption inequality.”
I think it is insightful. We start our first year economics by looking at utilities. We produce because we eventually consume to get satisfaction. Then the problem really lies in consumption but we weigh too much on income.
11. September 2013 at 15:37
I’m sure a lot of measured inequality comes from technological and cultural changes and maybe even rent seeking. But, I wonder how much is demographics. In 1980, there were a bunch of 30 year old baby boomers. Now they are 60. I suspect that 60 year olds have much higher income variation than 30 year olds, especially when they start retiring. Then, add in the relatively small number of middle aged workers, and the demographic bump of 20 somethings. You lump them all in one population with the aging boomers, and you should have even more measured inequality – especially since middle class kids are in school well into their 20s now.
In general, a higher income society will also have more inequality from consumption smoothing as a result of more schooling and longer retirement. Are there studies that adjust for these things?
11. September 2013 at 16:31
“Economic deregulation (removing barriers to entry from professions)…would help improve economic inequality.”
…except money. That must be monopolized.
11. September 2013 at 16:32
http://i.imgur.com/ArMQLRm.jpg
11. September 2013 at 16:56
Hang on a second Scott. I agree with you that the typical reporter and viewer of these stories thinks “income” and “riches” are the same thing, but technically YOU are the one introducing that confusion in your blog post title. The news stories aren’t saying anything wrong; they even say explicitly at the end how Saez is defining “income.”
So it’s a bit weird to accuse others of mixing things up, when actually you are the introducing the mixup.
11. September 2013 at 16:57
…you are the ONE introducing the mixup.
11. September 2013 at 17:04
OOPS sorry Scott, I re-read your opening and I see now that you are claiming the commentator on NPR explicitly said “wealthier.” What made me doubt you is that I googled for NPR on this story (I heard it too on the radio), and got an AP article.
But, that doesn’t mean you are wrong for saying the NPR reporter explicitly said “wealthier,” so sorry.
Also: When I heard the story, what drove me through the roof was that she kept saying, “The 1% did such-and-such, while the rest of us…” Somehow I doubt a story on racial profiling would say, “The police target young blacks wearing gang colors, while the rest of us don’t receive as much scrutiny.”
11. September 2013 at 17:59
America has lots and lots of problems that are much more pressing than “inequality.”
Actually, for envy-based Democrats, hate-the-rich tax-the-rich types, inequality is the big reason for the emotion.
Helping the poor, like the Dems have done to the poor in Detroit, is not the key issue. The key is the envy against the rich, and the emotional satisfaction of hating them, especially if they are in some ways being unjust.
11. September 2013 at 18:54
Scott, et al,
Suppose we judge economic institutions, policies, and outcomes in terms of their effect on the long-run prospects of the least well off, say the bottom quintile. (Since this objective is long-term, I don’t think current consumption is the best measure, but I’m open to any defensible measure.) Question: Is the U.S. doing better on this score than we were 20 years ago? Are we doing better than Sweden now?
11. September 2013 at 20:27
income inequality data is basically meaningless,
It’s considerably worse than meaningless, it assumes that a flatter distribution of wealth is always more desirable, a very dubious notion.
12. September 2013 at 00:34
I wonder if the Romanov’s sat around having these same discussions about how inequality really didn’t exist and, if it did, wasn’t really bad – right before they were executed?
12. September 2013 at 04:32
kebko,
why can’t someone marry economics to demographics better? For decades, Thomas Sowell has been saying that ‘quintiles aren’t people’ but everything is still evaluated based on the same dumb quintiles.
12. September 2013 at 05:22
Scott,
I don’t agree that measuring consumption is the best way to measure equality. Wealth provides security. Security is a pretty awesome thing to have, and not having it sucks. One person taps into a vast store of wealth to engage in consumption while another person spends their entire paycheck and then uses a credit card to engage in similar consumption. Which person would you rather be?
12. September 2013 at 05:48
Brian, Wealth is simply the present value of current consumption. So either metric is fine.
Joe, Jim Glass has the paper I was looking for. The claims of much more consumption inequality just don’t pass the plausibility test. I’m 58 years old, and It’s clear to me that consumption levels of the poor have risen faster than the middle class during my lifetime I don’t know about the rich, but they’re like 1% of the population. For at least 99% of the US economic inequality hasn’t changed much.
Thanks Jim.
Kebko, Very good point.
Tom, I liked the 1960s liberals much better. They rarely talked about “inequality,” instead they focused their attention on poverty.
Greg Hill, Actually the US and Sweden are similar in one key respect–high rates of immigration. Thus both countries have been very good to those on the bottom, as immigrants often do much better than in their old country.
Tom, Another commenter who doesn’t know how to read. Sad.
Bob, Wealth is the present value of consumption.
12. September 2013 at 07:16
Scott, I suggest you broaden your horizons on consumption inequality and read this paper:
http://www.nber.org/papers/w17982
12. September 2013 at 08:03
Higher inequality leads to lower economic mobility as the winners entrench themselves through bequests and changing the economic rules. Scott — you miss the point if you fail to address this issue.
12. September 2013 at 17:15
DF, You need to go back and read the comment section.
SK, But then income is the wrong variable. Which is my point.
I’m all for weakening the political power of the rich, but you certainly aren’t go to do that by going after income inequality, that idea is absurd.
12. September 2013 at 21:28
Because of income smoothing, consumption might offer a better measure of economic well-being. Unfortunately this fails for at least two reasons.
1) data own income is very good. Tax reporting means that we can obtain universe-level data and get a better snapshot of income. It suffers from problems of volatility, lifecycle effects,cetc. which are well-known meaning you need long panel data sets to study lifetime income. Consumption data is, as far as I’ve seen, is usually based on survey data, usually the consumer expenditure survey. There is a lot of no response bias at the upper end of that survey b/c high earners don’t respond. It’s essentially useless to say anything about the top percentile and that’s where much of the growth has been. This bias means the consumption distribution looks smoother than it actually is.
In short, the data on income is better than the data on consumption.
2) Consumption measures an individual’s ability to achieve a certain standard of living. Income measures an individual’s ability to achieve a certain standard of living, because of their own assets.
If you want to measure a person’s ability to achieve economic security free of debt and transfer payments, then I find income to be a better theoretical measure.
13. September 2013 at 01:35
Over a hundred years ago, Vilfredo Pareto noticed that wealth, property ownership and income followed what has become known as Pareto distributions, aka power laws and 80-20 rule. Pareto observed that 80 percent of land in Italy was owned by 20 percent of the people and 80 percent of the wealth was held by 20 percent. Income also follows Pareto distributions laws in that a small percentage of people always have a larger percentage of income.
It is a natural phenomenon. About 20 percent of internet sites get 80 percent of traffic, and about 20 percent of the world’s countries produce 80 percent of world GDP. One would also expect about 20 percent of professional sports players to make 80 percent of professional sports salaries and 20 percent of professional actors, singers, bands, rock groups, etc., to make 80 percent of the salaries paid in their respective fields.
In an 80-20 Pareto distribution world (e.g., Italy late 19th century), the richest 1 percent of the population would have over 50 percent of the wealth and income. Given that Saez says the top 1 percent have only 19.3 percent of the income shows that the US has much less income inequality than one would initially and naively expect. In a 1 percent-19.3 percent world, about 15 percent of the US population would be expected to have 50 percent of the income, and about 20 percent would have 55 percent of the income if the income perfectly followed a Pareto distribution. Saez’s numbers show the US is closer to following a 55-20 rule, and not the typical and expected 80 percent of income for 20 percent of its population.
Additionally, many researchers have documented that US income inequality was increasing until somewhere around the 1920s and then declined until somewhere in the 1970’s (maybe as late as early 80s) when it started to increase again. There are many theories as to why the reversal in the decline of income inequality happened at that time but there are no definitive answers.
The US appropriately responded by increasing government benefits and transfer payments, such as food stamps, earned income tax credits, subsidized housing and vouchers, and increasing the threshold for paying income taxes, so that almost half of Americans do not need to pay income taxes, etc. Unfortunately, Saez intentionally does not count government transfer payments and benefits in his income analysis. Nor does he count any employer benefits such as health care. He also ignores disposable income, which has increased at the lower income levels due to the reduction in their income taxes. It is somewhat ironic since France, where Saez is from, does count some government transfer payments and subsidies in its calculations of income inequality.
13. September 2013 at 05:02
Jos, Income is a horrible measure of one’s ability to maintain a standard of living. Wealth is far better. Income adds together things that are completely unrelated, like wage income and capital gains, and treats them like they are the same thing. That’s crazy. When I sell my house I’ll be “rich,” one year later middle class. Does that make sense?
Milton, Some good points, but the claim that nearly 50% of Americans are too poor to pay income taxes is a complete myth.
13. September 2013 at 05:06
Sumner — “I’m all for weakening the political power of the rich, but you certainly aren’t go to do that by going after income inequality, that idea is absurd.”
Really? Take a look at the Pikitty numbers. Income inequality peaked in the late 1920’s fell dramatically with the increase in financial regulation and has recently reached the 1928 inequality peak as inequality increased after the financial deregulation in the 1980s. Much of the inequality at the top arises from rents from financial deregulation with served no societal purpose. (That debate seems over given the Great Recession. Also, see Volker.) The inequlity/
13. September 2013 at 05:12
The relationship between inequality and political influence among the ultra-rich (carried interest, etc.) seems to show causation in both directions.
14. September 2013 at 06:16
SK, I agree about the carried interest loophole, but overall I don’t agree. I certainly don’t think deregulation of finance has been the big factor.
16. September 2013 at 22:16
I agree with your point that “for an individual” income is a worse measure of well-being than consumption or wealth at any given point in time. What I am focusing on is the real-world limitations in our ability to measure different theoretical concepts. In this case we need to see which gives the best measure of the distribution for a population. When we try to measure consumption we get a biased sample that does not include a portion of the distribution (from CEX). Further, the sample leaves out the population that is most interesting so it’s not useful to make points. Similarly when we attempt to measure wealth (perhaps by SCF).
We both agree that wealth and consumption are the ideal theoretical measures of well-being. What I’m trying to highlight is that a near-perfect empirical snapshot of a second-best theoretical measure is more useful than a biased and incomplete empirical measure of a near-perfect theoretical measure.