.... and how we might correct the distribution.
I came across a spectacularly good graphic the other day. I don't know that it will reproduce here, so I'll just provide you the link:
Open it in another window, let it fill the screen, scrolling if necessary to see it in full -- and then continue reading here.
It comes from a 2006 article in The Atlantic Monthly entitled "The Height of Inequality," which lays out very well the extent of the income inequality we have in America, though it starts with an explanation done in 1971 by Dutch economist Jan Pen, describing the distribution of income in the British economy at that time. (I've put part of it into bullet format.) It begins,
In 1971, Jan Pen, a Dutch economist, published a celebrated treatise with a less-than-gripping title: Income Distribution. The book summoned a memorable image. This is how to think of the pattern of incomes in an economy, Pen said (he was writing about Britain, but bear with me). Suppose that every person in the economy walks by, as if in a parade. Imagine that the parade takes exactly an hour to pass, and that the marchers are arranged in order of income, with the lowest incomes at the front and the highest at the back. Also imagine that the heights of the people in the parade are proportional to what they make: those earning the average income will be of average height, those earning twice the average income will be twice the average height, and so on. We spectators, let us imagine, are also of average height.
Pen then described what the observers would see. Not a series of people of steadily increasing height—that’s far too bland a picture. The observers would see something much stranger. They would see, mostly, a parade of dwarves, and then some unbelievable giants at the very end.
- As the parade begins, Pen explained, the marchers cannot be seen at all. They are walking upside down, with their heads underground—owners of loss-making businesses, most likely.
- Very soon, upright marchers begin to pass by, but they are tiny. For five minutes or so, the observers are peering down at people just inches high—old people and youngsters, mainly; people without regular work, who make a little from odd jobs.
- Ten minutes in, the full-time labor force has arrived: to begin with, mainly unskilled manual and clerical workers, burger flippers, shop assistants, and the like, standing about waist-high to the observers. And at this point things start to get dull, because there are so very many of these very small people. The minutes pass, and pass, and they keep on coming.
- By about halfway through the parade, Pen wrote, the observers might expect to be looking people in the eye—people of average height ought to be in the middle. But no, the marchers are still quite small, these experienced tradespeople, skilled industrial workers, trained office staff, and so on—not yet five feet tall, many of them. On and on they come.
- It takes about forty-five minutes—the parade is drawing to a close—before the marchers are as tall as the observers. Heights are visibly rising by this point, but even now not very fast.
- In the final six minutes, however, when people with earnings in the top 10 percent begin to arrive, things get weird again. Heights begin to surge upward at a madly accelerating rate. Doctors, lawyers, and senior civil servants twenty feet tall speed by. Moments later, successful corporate executives, bankers, stockbrokers—peering down from fifty feet, 100 feet, 500 feet.
- In the last few seconds you glimpse pop stars, movie stars, the most successful entrepreneurs. You can see only up to their knees (this is Britain: it’s cloudy). And if you blink, you’ll miss them altogether.
- At the very end of the parade (it’s 1971, recall) is John Paul Getty, heir to the Getty Oil fortune. The sole of his shoe is hundreds of feet thick.
As Garrison Keillor ironically informs his listeners, not every child can be above average. But when it comes to incomes, the great majority can very easily be below average. A comparative handful of exceptionally well-paid people pulls the average up. As a matter of arithmetic, the median income—the income of the worker halfway up the income distribution—is bound to be less than average.
This is true in every economy, but in some more than others. Back when Pen wrote his book, incomes were already more skewed in America than in Britain. Over the past thirty-five years, and especially over the past ten, that top-end skewness has greatly increased. The weirdness of the last half minute of today’s American parade—even more so the weirdness of the last few seconds, and above all the weirdness of the last fraction of a second—is vastly greater than that of the vision, bizarre as it was, described by Pen.
The article goes on to point out that (1) at the time, the US giants were even taller than the British ones; (2) that in the intervening years, a highly disproportionate share of US income has gone to make the giants taller yet in proportion to the rest of us. It quotes a study suggesting that a large share of the top income earners were sports and media celebrities and top corporate executives. 13,000 people in the 99.99th percentile, with total earnings of $83 billion in 2001. (an average of $6.4 million, so some are much higher, many a lot lower.) In 2001, there were probably relatively few Hedge Fund managers pocketing billions each (and their incomes are likely not shown as wages, but rather as "capital" gains, taxed at less than all but our lowest wage earners must pay in federal income taxes, and not subject to Social Security or Medicare taxes.
Most of us, as the article points out, have a big problem with sports or media celebrities receiving large incomes, considering it a "perfecting of the labor market." But how is it that corporate executives get to harvest so much? We know about hand-picked board compensation committees which reward their pickers with high incomes, whether or not performance has been strong. But do we think about just how it is that there is so much for them to work with? Do we know why so little goes to the rest of the parade in wages? We're so used to the situation that we no longer examine it. Even your family's college economics major probably has never been exposed to a serious examination of the question. Air to the bird, water to the fish -- just the environment we live in, not even interesting enough to study, until it no longer supports life.
Here's an account of a talk Joe Stiglitz gave last summer during his lecture tour in Australia, which might shed some light on how so much is available for those corporate executives and their compensation committees, as well as for the shareholders:
Professor Stiglitz told a packed UQ Centre that Australia's economic stimulus package was the best designed in the world.
AND he said natural resources - coal, iron ore - should be properly valued at market just like the electromagnetic spectrum.
The government auctions the spectrum to the highest bidders who want to operate mobile phone networks, cable companies, television and radio stations.
Basically, a country - like Australia - will end up poor if doesn't get the best price for its assets - and natural assets are not renewable, once they are gone they are gone. If the proceeds from the sale of these assets are not invested in infrastructure to support and grow other sectors the economy (manufacturing and value-adding, goods creation) then a country and it's people will not prosper - HELLO! HELLO! Drowning not waving.
"It should be subtracted from Gross Domestic Product (GDP)," he said. "You are selling off assets at a very low price if you don't have adequate taxes on mining - you are being cheated," he said to audience applause.
He thinks resources should be auctioned off to the highest bidder - the free market at work. Of course, the mining industry will make all kinds of threats.
To everyone's amusement he joked about how mining companies bamboozled, threatened and bribed governments of developing, fragile nations.
"I assume that's not the case in Australia," he mused.
To prosper, a country needs to set up a stabilization fund (from a mining tax, if not a resources auction) for nation building.
This is what he calls an investment fund for building infrastructure and to grow value-adding industries, maintain education, job creation.
Not only that but the sell-off of natural resources should appear on a country's accounts as a kind of depreciation of assets - otherwise the accounts are not accurate. ...
He made these comments at the end of the oration after he explained the difference between the financial sector and the economy - the economy is not the financial sector.
The financial sector (the banks and regulators) are the culprits behind the global financial crisis which has crippled the global economy. Apparently, moneylenders have been skimming 40 percent of the profits from companies that actually make and produce things. His big point was that this is not really the role of the financial sector. The financial sector's job is to support economic growth, not cripple it.
"Finance is a means to an end," he said. "The lack of balance between the financial sector and the economic sector was actually the real problem in this economic crisis (NOT the real estate bubble)."
Why aren't the workers getting more? In large part because there isn't competition for their labor. Why is this the case? In part because our natural resources are being given out -- at bargain prices -- to corporations which have monopolized them. And, while about half of us have some stock, stock ownership of publicly held companies is quite concentrated (top 5% hold 66.5%), and ownership of privately held companies (a larger figure at the household level) even more so (top 5% hold 88.1%).
So how do we create more competition for the services of workers? How do we create more opportunity for all to employ themselves if they don't like their chances with other employers? To find out, explore this blog, explore the ideas associated with the name of 19th century economist and philosopher Henry George.
Political economy is the science which deals with the natural laws governing the production and distribution of valuable goods and services. I'll also reference Adam Smith's definition:
Political economy considered as a branch of the science of a statesman or legislator proposes two distinct objects, first, to supply a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public service. It proposes to enrich both the people and the sovereign.
Which people? All people?