The New Yorker Opines on Economics & Politics

Here: Four Lost Decades: Why American Politics is All Messed Up. Got me to musing.

Pretty ambitious title for a short essay. Mostly, it’s just numbers out of context and musings. Context would require at the very least wondering about who makes up the various bands – the top 5%, those under the poverty line (and using a consistent poverty line), the middle class – all over time. Ever wonder if, over forty years, the nature of the people the data is being collected on has changed? Personal example; my father ran his own small sheet metal fabrication shop in 1973, and probably made a the top 5% income. Of course, the tax rates at the time were very high, so he would have been highly motivated to not take taxable income above certain threshold levels – thereby inadvertently swelling the ranks of the middle class by one family right at the top end, as opposed to swelling the ranks of the upper middle class at the low end. 40 years later, only 2 of his nine children make anything like the (inflation-adjusted) kind of money he made in 1973 as a 56 year old highly talented and experienced sheet metal fabrication expert with an entrepreneurial streak. Several of my siblings are probably at or below the poverty line, and several more make good middle class livings. None work in sheet metal. All this is to say that when we’re comparing rather arbitrary groups like ‘the top 5% of income earners’ 40 years apart, we’re making a bunch of radical assumptions about real people, the chief of which is that all differences make no difference as long as the aggregation is big enough – kind of like psycho-history, which, it is good to recall, was and remains fiction.

In this essay, the author points out that incomes are flat for middle income people over the last 40 years, but not flat for the top 5%.  Consider that the top 5% – the individual people, as well as the manner in which they make their money, has almost certainly changed for at least a large part of that crowd. In 1973, that group might have had stock brokers, lawyers and CEOs, but few high-tech entrepreneurs, not to mention college coaches and professional relief pitchers. Does the mix of jobs really make no difference to the analysis?  Also, some people make their money and then stop – top professional athletes and early Google employees, for example – they may have little if any reported income, but live what we would call an affluent life off their previous earnings. I would suspect – but have no numbers – that the number of well-off and retired or semi-retired people has grown since 1973, at something like the rate of retirement communities + the growth rate in, say, sailboat sales.  Who knows? But ignoring that population calls into question the rest of the numbers.

Cassidy doesn’t consider the entire top 5% in his analysis but rather, the 95th percentile.  What this means is that we’re excluding the top 1% – the 99th percentile – and, especially the top 0.1% – the 99.9th percentile. I suspect two reasons for this: the first is that the very top wage earners can skew things wildly. A Derrick Rose, for example, just went from about $5 million a year to $17 million. Of course, he might make that number for the next 6 or 8 years if he’s lucky, then, as an old man of 35 or so, he’ll retire. He’ll have bought himself all the houses, cars and health care he’ll ever need by that time, and may therefore, if he’s lucky and smart, live like a king on little if any taxable income – maybe even below the poverty level! His accountant and tax attorney will work it out.

Second, his audience are readers of the New Yorker. We can back into the demographics of that readership by looking at the ads. I’d guess the 95th percentile is probably squarely in the middle of that target. (Just yesterday, overheard a conversation between two New York professionals, at least one of whom lives in Manhattan, in which the tribulations of the life of a friend were discussed – his options were sadly limited, as he only made “mid-six-figures”. Oh, the humanity!)

Comparing group A – the 95th percentile form 1973 – with group B – the 95th percentile in 2013 – would seem to require a lot of caution, research and caveats. Just assuming that normal generational changes, not to mention social upheavals, have no meaningful effect is reckless, and is among the many reasons I don’t give too much weight to these sorts of comparisons. Anyway, here’s a bullet point from the above:

  • At the top of the income distribution, things look very different. Forty years ago, a household in the ninety-fifth percentile of the income distribution—i.e., a family with nineteen families below it for every one above it—earned $133,725. In 2012, a household at the same spot in the income distribution earned $191,156. That’s an increase of forty-three per cent.

Just a little math: 43% over 40 years comes out, though the wonders of compounding, to an average annual growth rate in income of less than 0.9%, or an $89 per $1,000 per year of additional income.  So, the mythical average well compensated individual in the 95th percentile might see around a $1500 increase in pay in an average year – less taxes, which run over 40% here in California. So, it’s not like the 95th percentile were running off to vacations in Bermuda with their extra $800 each year. But, through the wonders (and probably illusions) of compounding, after 40 years we’re talking real money. All one has to do is enter the 95th percentile at age 25 – not happening very often – and work 40 years, and you can see your wages, on average, rise similarly. Or, what’s more likely yet not discussed, is that the 25 year old enters the workforce a lot closer to the poverty line than the 95th percentile, and, after those 40 years of work, manages as an old man to crack the top 5%.

Of course, it’s better to get the extra cash than not, and the average middle class wage earner was getting only a few dollars a year extra over the same period, but – are we really going to foment some outrage over $800 a year? Does that makes the 95th percentile manipulative greedy bastards? Do we believe that this $800 is being used to buy senators and stack the economic and tax policies of the nation in order to favor people making $150k/year? Really?

My suspicions by now should be clear: what seems to be the case among the people I know is that young people tend strongly to get less well paid jobs than older people with a ton of experience who have patiently worked their way up the ladder. In many occupations, that ladder has been destroyed or shrunk – the idea that a factory worker could make an ever more lucrative career out of factory work just by putting in the years is pretty ridiculous now days, if it ever existed outside of a few high-end union jobs.  Just as the economy told people to get out of buggy-whip making, it’s now telling anyone with ears to hear that you don’t want to be unskilled or semi-skilled factory labor.

I’d want a much better breakdown of the data, as well as data on people moving in and out of various percentiles as they age or move, how people enter and leave the workforce and how this has changed over time, and goodness knows what else before I’d considering whether blanket, population level assertions might be valid. Just because some data submits to high-school level statistical analysis doesn’t mean it tells you anything.

And,, of course, wealth and income are two very different things.

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Author: Joseph Moore

Enough with the smarty-pants Dante quote. Just some opinionated blogger dude.

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