James Kwak, coauthor of the new financial crisis book 13 Bankers, recently sought to explain his thesis “in 4 pictures.” And impressive pictures they are. But I’ve been particularly struck by one of them — this chart, from a paper by economists Thomas Philippon and Ariell Reshef, showing the close correspondence between deregulation trends on the one hand and the ratio of financial sector wages to private sector wages on the other. My reaction to the chart was essentially, Huh. Those trend lines look like the basic income inequality trend line.
But to my knowledge, no one has really made this point since the chart has circulated widely. Certainly no one has tried to illustrate it.
Maybe people just lack my whiz-bang PowerPoint and Excel skills, or maybe I’ve actually had an Original Thought. But take a look at the chart I created, which overlays a trend line showing the share of income received by the top one percent (the black line) on top of the Philippon-Reshef chart. The trend line comes from the widely cited work of economists Thomas Piketty and Emmanuel Saez, who used IRS data to look at the incomes of the very rich:
I’ve argued before that I think the Piketty-Saez top-share trend line overstates the recent rise in income inequality, but I don’t see much reason to doubt the basic U-shape of the trend since the Great Depression. For all of the consensus around the basic inequality trend, there’s surprisingly little agreement or understanding as to why it looks the way it does (a major theme of Paul Krugman’s Conscience of a Liberal). Could it really be as simple as the extent of financial regulation? Every analyst bone in my body says this is too easy, but…but….
Of course, saying it’s all financial regulation trends isn’t necessarily inconsistent with Krugman-esque arguments that it’s all about changes in cultural acceptance of inequality. Maybe financial regulation flows from public attitudes about inequality.
Anyway, interesting — no?
Tags: Ariell Reshef, Economy, Emmanuel Saez, Financial reform, Inequality, James Kwak, Paul Krugman, regulation, Thomas Philippon, Thomas Piketty
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I would suspect that financial regulation and public attitudes about inequality are related. What is one major innovation that the financial sector has given us? The “tournament” style of performance compensation. Those who “win” are rewarded handsomely for their efforts, while those who lose get to be middle managers and earn a decent wage. I would argue that the financial sector has largely transferred this compensation model from Wall Street to the rest of the economy, and thus the correlation makes sense.
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“… my whiz-bang PowerPoint and Excel skills …”
That IS a whiz-bang chart , but I’d suggest one more line to plot : top marginal tax rates on an inverted scale. You’ll get the same U-shape and time correlation.
“Could it really be as simple as the extent of financial regulation?”
Combine reduced tax rates on the rich with finance deregulation and you’ve got the major causes of the surge in inequality , IMO.
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