Mirabile Dictu: Wall Street Journal Says Income Inequality is Rising

After denying the existence of rising disparities in income and wealth on it editorial pages, the Wall Street tells us that income inequality is indeed on the rise. It’s a refreshing change from January, when the Journal misrepresented a speech by New York Fed President Timothy Geithner in which he said that the growing concentration of wealth at the top was undermining support for free trade. The Journal’s coverage focused on the opposition to free trade and barely acknowledged that Geithner described income inequality as the proximate cause, despite the fact that the discussion of rising inequality took up roughly half of his remarks.

One peculiar aspect of this story by Greg Ip is that it cites IRS data and “scholars,” but the only researchers mentioned by name are Steven Kaplan, Joshua Rauh, and Jason Furman. Tthe failure to mention the work of Thomas Piketty of École Normale Supérieure in Paris and Emmanuel Saez of the University of California at Berkeley, whose work in this area is generally regarded as the most thorough is a glaring omission.

This is yet another instance of the Journal being late to treat a well-recognized development as a news item. I am no expert, yet increasing inequality of income and wealth was such an obvious trend that I recommended that a major financial services company focus on the super wealthy as a growth market back in 2004. Where has the Journal been?

One small consolation: the efforts to separate the rich from their wealth have also escalated. A high-end jewelry designer (he uses the same workshops as Cartier) paid a rare visit to some retailers. At Bergdorf Goodman, a typical item he saw was an admittedly beautiful bracelet made of Kevlar and perhaps 4 carats of micro-pave diamonds.

Sales price? $125,000. Value of materials? At the very most (and this is a stretch) $15,000.

This is significant because in the old days, the markup on fine jewelry was two to three times. Now it is being marked up to the same degree as costume jewelry.

From the Journal:

The richest Americans’ share of national income has hit a postwar record, surpassing the highs reached in the 1990s bull market, and underlining the divergence of economic fortunes blamed for fueling anxiety among American workers.

The wealthiest 1% of Americans earned 21.2% of all income in 2005, according to new data from the Internal Revenue Service. That is up sharply from 19% in 2004, and surpasses the previous high of 20.8% set in 2000, at the peak of the previous bull market in stocks.

The IRS data, based on a large sample of tax returns, are for “adjusted gross income,” which is income after some deductions, such as for alimony and contributions to individual retirement accounts. While dated, many scholars prefer it to timelier data from other agencies because it provides details of the very richest — for example, the top 0.1% and the top 1%, not just the top 10% — and includes capital gains, an important, though volatile, source of income for the affluent.

The IRS data go back only to 1986, but academic research suggests the rich last had this high a share of total income in the 1920s.

Scholars attribute rising inequality to several factors, including technological change that favors those with more skills, and globalization and advances in communications that enlarge the rewards available to “superstar” performers whether in business, sports or entertainment…..

Jason Furman, a scholar at the Brookings Institution and an adviser to Democratic politicians, said: “We’ve had a 30-year trend of increasing inequality. There was an artificial reduction in that trend following the bursting of the stock-market bubble in 2000.”

The IRS data don’t identify the source of increased income for the affluent, but the boom on Wall Street has likely played a part, just as the last stock boom fueled the late-1990s surge. Until this summer, soaring stock prices and buoyant credit markets had produced spectacular payouts for private-equity and hedge-fund managers, and investment bankers.

One study by University of Chicago academics Steven Kaplan and Joshua Rauh concludes that in 2004 there were more than twice as many such Wall Street professionals in the top 0.5% of all earners as there are executives from nonfinancial companies.

Mr. Rauh said “it’s hard to escape the notion” that the rising share of income going to the very richest is, in part, “a Wall Street, financial industry-based story.” The study shows that the highest-earning hedge-fund manager earned double in 2005 what the top earner made in 2003, and top 25 hedge-fund managers earned more in 2004 than the chief executives of all the companies in the Standard & Poor’s 500-stock index, combined. It also shows profits per equity partner at the top 100 law firms doubling between 1994 and 2004, to over $1 million in 2004 dollars

Update, 11/12, 2:40 PM: Trader Magazine focused on a tidbit in the story that was apparently added after the initial posting of the article, namely, what the bottom half makes:

The bottom 50% earned 12.8% of all income, down from 13.4% in 2004 and a bit less than their 13% share in 2000.

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