What Thomas Piketty and Larry Summers Don’t Tell You About Income Inequality

By Lynn Parramore, Senior Editor at INET. Originally published at INET

In a new paper for the Institute For New Economic Thinking’s Working Group on the Political Economy of Distribution, economist Lance Taylor and his colleagues examine income inequality using new tools and models that give us a more nuanced — and frightening —picture than we’ve had before.  Their simulation models show how so-called “reasonable” modifications like modest tax increases on the wealthy and boosting low wages are not going to be enough to stem the disproportionate tide of income rushing toward the rich. Taylor’s research challenges the approaches of American policy makers, the assumptions of traditional economists, and some of the conclusions drawn by Thomas Piketty and Larry Summers. Bottom line: We’re not yet talking about the kinds of major changes needed to keep us from becoming a Downton Abbey society.

LP: In America, the top 1 percent has steadily increased its income share while the rest are either treading water or sinking. Let’s talk first about how you’re measuring the problem of inequality. 

I think we need some detail to really understand what’s going on. So I look at inequality across low, middle and top groups. How does the share of income of the richest group compare to the others? Where do these groups get their income and what do they do with it? Is the middle getting squeezed? What’s driving income towards the rich?

In the U.S., if you are in the bottom 50-60 percent group of households, your main sources of income are wages and, especially for the very bottom, government transfers like Medicaid and Social Security. In the reported data, this group has a negative savings rate, meaning that people spend more than they receive. Their average wealth is close to zero.

If you’re in the “middle class” — households between the 61st and 99th percentiles — wages are your main income source, though you may get some capital income from interest and dividends. In recent decades, people in this group have been getting squeezed as income flows shift toward profits for business owners rather than wages for employees. The variation in wages has been increasing among this group as well. The middle class has positive saving rates and visible net worth, largely concentrated in housing.

If you’re in the top one percent group, you get income from wages, with a lot of variability among individuals. But bigger chunks come from interest and dividends along with proprietors’ incomes, like lawyers’ fees and big farmers’ subsidies and sales. These people have high saving rates and substantial wealth, including equity. The top group holds one-third of total equity in the U.S. and receives large capital gains. Their share of total disposable income (not including capital gains) has jumped by around ten percentage points since the mid-1980s. This is an enormous change in shares, very unusual in historical terms. The top group’s income now exceeds three trillion dollars, one-fifth of the total.

The picture we get from making these comparisons can be captured in a ratio named for Gabriel Palma of the University of Cambridge, the “Palma ratio” which draws a contrast between the rich and poor. It tells us that in the U.S., the income per household of the top one percent compared to the bottom 40 percent has more than doubled since the 1980s, while incomes at the bottom were virtually flat. Compared to other rich countries, the ratio here is very high.

LP: Your research suggests that it’s not just some natural process that’s causing more wealth to flow towards the rich than the other two groups. How is it happening?

There are three things happening that seem especially important to me: stratospheric CEO and executive pay, shrinkage in the wage slice of the total income pie due to various social and political forces, and a trend of higher capital gains or rising asset prices which benefits the rich. None of these factors is inevitable.

First, salaries at the very top shot up after 1980, as Thomas Piketty emphasizes. This was mostly among CEOs (along with other top executives) who get paid in eight figures with salaries and stock options. It’s hard to explain skyrocketing  executive pay on purely economic grounds. There is no reason to believe that top managers circa 2015 are more or less essential than, say, in 1975 when comparable pay was ten times lower. The best explanation I can come up with is that a social contract or unwritten law against exorbitant executive income has disappeared in the U.S. We’ll only get it back by social consensus and/or seriously progressive taxation.

Second, people are working more productively, but they aren’t getting paid for it. Since World War II, there have been predictable cycles in America (in a pattern for rich capitalist economies noted by Karl Marx 150 years ago). When we come out of a recession, productivity rises as firms make more use of labor already on the payroll. Wages, on the other hand, are stable. So business owners end up with more profits, and business activity picks up. The labor market gets tighter and eventually wages begin to catch up, cutting into profits, capital investment, and eventually, the total demand for goods and services in the economy.

In keeping with this cycle, real wages now may finally be creeping up after the Great Recession. But the bad news is that the overall wage share has been trending downward – another huge inequality jump. The reasons again are social and political. Three of the most obvious explanations of why real wage growth (adjusted for inflation) is failing to keep up with productivity are the impact of globalization,  repression of labor activism and a stagnant minimum wage.  Servaas Storm and C.W.M. Naastepad of the Delft University of Technology document how the U.S. ranks low on employment protection, expenditure on active labor market policy, and collective bargaining. Social attitudes and political decisions are the reasons why.

The third factor has to do with capital gains, or rising asset prices,  a trend that mainly benefits people with high incomes.  Asset prices are rising for a lot of reasons, like corporate share buybacks, which tend to pump up the price of shares in a way that benefits executives and others who hold a lot of company stock, low interest rates pegged by the Federal Reserve, and speculation. Equity price increases reduce business net worth on paper or increase debt for buybacks.  But they are a visible income flow like interest and dividends for their recipients who also benefit because the U.S. tax rate on capital gains is low.

LP: Let’s take a look at a couple of ideas that are popular right now, like raising the minimum wage and increasing taxes on the highest income brackets. How might these measures impact income inequality in America?

How much could the top one percent “reasonably” be taxed? If we wanted to tax them as much as rich European countries do, we’d have to double their tax burden. The Obama administration is now floating an increase of about one percent of the top group’s income. That’s not going to do a lot for income inequality given how much richer the rich have gotten since 1980. A marginal tax rate around 60 percent, the Scandinavian norm, could do the trick, but putting it into place here seems highly unlikely. The same observation applies to higher capital gains taxation and Piketty’s recommendation of a tax on wealth. It won’t be enough.

Of course taxes could also be raised on less affluent households, but the prospects are not much better. Our models show that unless the U.S. tax/transfer system is made dramatically more progressive, adjustments around the edges will not have much impact on income inequality.

On the wage front, we looked at what would happen if you raised the wages 10 percent for the poorest 20 percent, and 5 percent for the next 20 percent. That would sound like a pretty big proposal if an American politician floated it. But our models show that it hardly moves the Palma ratio. It does very little to change income inequality.

Also, you have to keep in mind that the U.S. transfer system effectively “taxes” you at a steep rate if you’re low income and get a higher wage because your benefits, like Medicaid, will be reduced. When you factor in these kinds of mechanisms, you see that policy initiatives within the range now be being discussed will not strongly affect income inequality in the U.S. economy.

LP: Thomas Piketty’s work on inequality has generated enormous interest.  How does your analysis of how the rich grow richer differ from his?

To judge from his writing, Piketty is well aware that social relations and power strongly influence income inequality. But there are problems with the way he thinks economies work in the long run. He’s using the standard supply-driven growth model, assuming that there is always full employment and investment is determined by saving.

But there’s another way of looking at growth, with less than full employment and investment driving demand.  From this view, economies grow when people spend their money on goods and services.

Luigi Pasinetti, a Cambridge economist, has looked at the economy in terms of two classes – “capitalists” who collect profits on the capital they own and “workers” who get the rest of income. Extending his work shows that when the wage share falls over time, workers will not only have less wealth, but economic growth will slow because people don’t have as much money to buy goods and services. In other words, wage repression (and excess capital gains, too) create stagnation in the long run.  You can think of the top one percent as Pasinetti’s capitalists and the middle class as his workers. (Poor households don’t figure into the story of wealth because they don’t have any, although they do have an impact on the economy when they spend money on goods and services).

Our preliminary simulations show that the top one percent’s share of wealth might stabilize in the range of fifty percent (half the total pie), and the growth rate might settle down at less than two percent per year, which would be a less vibrant economy than we’re used to. One bit of good news for middle class families is that in the long run, they do retain the power to save from wages, which to an extent protects their wealth. Piketty does not take this linkage into account.  But overall, a falling wage share will hurt the entire economy and hold back everyone, even, eventually, those at the top.

LP: Larry Summers, former Treasury Secretary and advisor to President Obama, is now co-chairing a commission on inequality sponsored by Center for American Progress (CAP). The commission has a new report that looks at how to increase wages and living standards for working families. Do you think their suggestions could work?

Summers is the bellwether of mainstream macroeconomics. When he changes his mind others follow, so his recognition of the problem of income inequality is all to the good. But the mainstream’s basic supply-driven growth model  is the same as Piketty’s, which is reflected in the CAP report.  The report does mention the problem of deficient demand — how the economy suffers when regular people don’t have enough money to spend on goods and services, and it advocates policies to boost income. But the basic analysis looks at potential  economic growth from the supply side. Its recommendations such as improved education (or more “human capital”), modest tax reform, and provision of public jobs, tailored to perceived political limitations, are mostly supply-oriented and of the same magnitude as the ones I’ve mentioned.  I doubt that they would much impact on American inequality.

LP: In your view, is there anybody in the U.S. offering meaningful approaches to income inequality?

Not in the general political debate.

LP: So what’s to stop us from becoming a Downton Abbey society?

We’ve got to have a real social consensus that the way things are going is dangerous and unacceptable, and an understanding that it will take seriously progressive taxation to make a dent in the problem. But I am not optimistic about the prospects. Through various channels ten percent of national income has been transferred to an über class. Without the political will, that sort of change is difficult to undo.

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  1. Ben Johannson

    The commission recommendations are the same tired, failed policies in use since the Johnson Administration: some infrastructure, some job training, some tax blah-blah. “Fix the poor” type thinking. It will give the left another opportunity to pretend it gives a damn, though, which I suppose is the purpose.

  2. diptherio

    Their simulation models show how so-called “reasonable” modifications like modest tax increases on the wealthy and boosting low wages are not going to be enough to stem the disproportionate tide of income rushing toward the rich.

    Well, they wouldn’t be considered “reasonable” if they did stop that tide of income…then they’d be “radical” and “socialist” {gasp}

    On the wage front, we looked at what would happen if you raised the wages 10 percent for the poorest 20 percent, and 5 percent for the next 20 percent. That would sound like a pretty big proposal if an American politician floated it. But our models show that it hardly moves the Palma ratio. It does very little to change income inequality.

    Also, you have to keep in mind that the U.S. transfer system effectively “taxes” you at a steep rate if you’re low income and get a higher wage because your benefits, like Medicaid, will be reduced. When you factor in these kinds of mechanisms, you see that policy initiatives within the range now be being discussed will not strongly affect income inequality in the U.S. economy.

    Once again, of course none of the comfortably- to ridiculously-wealthy who make up our congress are going to discuss policies that would strongly affect income inequality. The fact that they are even being discussed at all should prove that much.

    What we need is worker-ownership of the means of production: i.e. co-ops.

    1. Jef

      Both Socialism and Communism address the threat of “No Money = You Die” so they both can not be allowed to exist. They have never really been allowed to flourish and in fact have always been undercut by outside forces in order to discredit them.

      Some form of a combination of the two would be optimal but I see no way to get there from here.

      Capitalism is a one way street and will always end up where we are now so obviously heading no matter how we tweak it. The only reason it has lasted as long as it has is because there has been periodic refresh events that have set things up for further growth. The level of reset that is now required combined with modern social conditions makes it highly unlikely that a truly beneficial refresh could even happen.

      1. Vatch

        Pure capitalism is obviously a disaster, as current levels of wealth inequality demonstrate. But the historical record of communism is also a disaster. Communism may address the thread of “No Money = You Die”, but there are loads of other ways that communism manages to kill people. The history of the Soviet Union (especially under Stalin, but under other leaders, too), Communist China (read about the Great Chinese Famine), and Pol Pot’s Cambodia are the worst examples.

        What’s needed is a genuine mixed system, in which the regulators have some clout, unlike the farcical system existing in the U.S. today, in which the giant corporations and billionaires own the regulators.

        1. trinity river

          For a very long time, my question has been what is capitalism? All the dictums used to describe capitalism are not compatible with each other in the real world. Now, of course, we can ignore that if we use hypothetical models since nothing is required to be tested against reality. As Yves points out we don’t require or allow anyone to question what the purpose of our economic system in the first place.

          1. susan the other

            This really is everybody’s favorite question, whether they know it or not. Capitalism isn’t even an ism. It’s just an loophole protocol for fake accounting purposes – or incomplete accounting purposes. Capitalism is incomplete at best. Absurd even under normal conditions. Socialism and Communism seem to be more socially balanced. We might be insane. None of our methods confronts our reality, let alone our threats. What are the MidEast countries (pure oligarchies pandering to religious hallucinations interpreted as law) doing to mitigate global environmental degradation? What is China doing? China is merely slowing down its explosive progress (which isn’t helping many poor Chinese). Dear god please tell me India has a plan. The plight of poorer people in the western countries is almost meaningless compared to the inability of developing countries to develop organically with real-life checks and balances. Peak oil might be our salvation. If we all just admitted to this reality, we could salvage ourselves. Distributionism? Localism? But probably not capitalism.

            1. Jef

              Susan et al – Like I intimated we have never had any of the isms unfettered by the interests and machinations of a small minority of psychopathic manipulators. We are completely unable to dismiss off-hand socialism or communism as we have never seen them in action. I do think we have seen enough to design a hybrid that would elicit the best of what humanity has to offer and suppress the worst behavior.

              All the other Countries you mention are simply functioning as best they can in a world dominated by … whatever you wish to label the Empire D’jour USAism.

          2. James Levy

            I think Marx’s definition–commodity production using wage labor for a monetized market–is pretty good if incomplete. It’s paying people who don’t own the means of production a wage so that they can produce goods and services, the profits from which are confiscated by the capitalist. That mostly says it.

        2. Glenn

          You say: “Pure capitalism is obviously a disaster, as current levels of wealth inequality demonstrate.” But what does our present system have to do with pure capitalism? We have massive government intervention in our society, including a central bank. That has nothing to do with pure capitalism. Perhaps pure capitalism would be disastrous, but you certainly can’t base that claim on today’s system. The analysis in this article says nothing about how government bailouts represent a transfer of wealth from the poor and middle classes to the elites. This creates moral hazard, which encourages more risk taking, and when the risk doesn’t pan out, another bailout. This is what happens under a central banking regime. Very little of what goes on in our economy has any place in a true free market. It has been aptly called crony capitalism or, just as accurately, participatory fascism. And the people who benefit the most from the current system are the very ones who have the power to change it. But please don’t call it pure capitalism, because it is anything but that.

      2. Jerry Hamrick

        I agree with you, Jef. The economic system that would take the best elements of the hated two “isms” would work well in a true democracy, but our representative republic in which all power is in the hands of a few men chosen by a corrupt process of elections will, as you say, never allow them to get even a toehold. And I applaud you for saying, “I see no way to get there from here.” It is crushingly depressing to dwell on how many of our current economic experts put forward their favorite remedies but never admit that they don’t know how to implement them. They all tacitly assume that change can be wrought by working within the current system. They aren’t serious. They are frauds.

        But I think there is a way forward. I think that the democracy of ancient Athens can be adapted to fit into our large population and vast geographic expanse. We aren’t very far away from being a democracy and that is one of the reasons that our government has held on as long as it has. It can be called a democracy and we Americans buy it. But we are not a democracy. We are an elected oligarchy.

        But, as you say, we still have to “get there from here.” I believe that there is a way to do that as well. But it requires working outside the system. The occupy movement, if it was a movement, did not try to work outside the system. It tried to effect change by getting the system to come to its senses and do the right thing. The way to get there from here is to accept the idea that the current system will not serve us, the people. We have to create a democracy that operates outside our representative republic. With our modern means of communication we can form the structure we need to confront the current system and overwhelm it on its own terms. Then we can change it for the lont haul. It can happen swiftly. I think the time is right.

        1. Lynn Allen

          Jerry, your reply intrigues me and I think it has merit, but what would such a structure look like and would it need central leadership coming from somewhere. If it is outside the system, would it need to become a system of its own in order to be effective? It seems to me the Occupy movement failed because it didn’t have a center that was strong enough to withstand the forces within the system. How would a movement outside the system withstand, break through, or survive long enough to be viable?
          P.S. I have looked for a way to “opt out” and short of moving to Antarctica, I can’t really find one.

          1. Jerry Hamrick

            Lynn Allen, I was not nearly clear enough in my comment. The movement I was describing was to overpower the current system and then replace its structure. By “overpower” I mean to work to use the current system but to work against it so that the offices from top to bottom would be filled with those who want change. It would require motivation, money, and moxie. Right now, young people can see the future and they can see that it does not look good for them. They want to make a change but they don’t have the power or the money. But they know what to do if they had the power. The older generations have the power and the money to effect change but they do not know what to do, and they do not have energy to do it even if they knew. An intergenerational pact between young and old would work. The young people need to define the changes they would make and then ask the older people to support them with money and votes. If we start tomorrow, we can have a new government by 2020–and we need to do it.

      1. Yves Smith Post author

        You may not have intended it to come off that way but your comment comes off as both a demand and a criticism. The purpose of comments is to add to what the posts provide. A demand and a mere link does not advance the conversation, as you can see by the absence of comments beyond mine.


        1. This site is run by all of 1.3 people working absolutely punishing hours. We are not omniscient but you seem to think we are. Your comment is an assignment. Please read our Policies about assignments.

        2. We been covering ideas from classical economics and the notions of taxing land for years via posts from Michael Hudson. This is not news to any regular reader of this site.

  3. financial matters

    It’s definitely going to take some radical ideas to change the inequality picture and I think this also ties in to what Varoufakis is trying to accomplish.

    Currency stabilization and free flow of credit seem basic to global stability. Polanyi, Keynes, Varoufakis and Stiglitz recognize that these have a strong social component as opposed to a strong ‘free market, neoliberalization’ component.

    In The Global Minotaur, Varoufakis talks about the importance of a Global Surplus Recycling Mechanism (GSRM) and an International Currency Union.

    He sees both Europe and the United States as a ‘bankruptocracy’.

    So, importantly, he is not just about Europe and the United States.

    Naomi Klein reaches similar conclusions in This Changes Everything. She sees the global nature of the climate crisis as a rallying point to help right past wrongs and lead to a more balanced society.

    Varoufakis and Klein are both displaying sharp critiques of how unfettered capitalism can destroy our social systems.

    1. susan the other

      Yes, Varoufakis does advocate for what goes around comes around. And he’s mostly right. But I stall out when I see the word “surplus” because it really doesn’t exist in nature in any measurable context. What ecosystem creates a “surplus”? We could say that this vanishing act is because nature has almost infallible recycling processes. I like to think that is true. That anything that can be considered “surplus” is instantly reabsorbed into the system. Keeping it in a viable steady state. It’s a wonderful idea. But it is deceptively simplistic. Because it is, in fact, so complex. How we gonna do this?

      1. susan the other

        And also too. Adenosinetriphosphate. AKA money. Adenosinetriphosphate does not fluctuate. It is a biological constant. A mere chemical. Just think about the fate of all those honest, hard-working amoebas when they exchange some free floating ATP and realize it has been devalued. Slashed in half. System collapse. And no, I’m not advocating the gold standard. Because gold was the first fiat. Gold led us all astray. All money needs to be available in abundance and well spent. Spend it on science, environmental technology, toxic prevention, toxic cleanup, education so generous it never lets you down, and the pursuit of truth. Or truthiness, whichever survives. I’m betting there really is something more to truth than to truthiness.

      2. financial matters

        Good question in the details. He’s mostly talking about trying to even out current accounts so countries like China don’t have to build up huge reserves to protect them from a run on the currency like we had with smaller countries in the Asian crisis and countries like the US running large deficits.

        Both the US and China could benefit from these changes at least as far as building up better domestic economies. More jobs in the US and better purchasing power in China.

    1. Doug Terpstra

      Good catch; but still timely, since all of the “reasonable” remedies — like obama’s DOA by-design, throw-them-a-bone, let-them-eat-rhetoric policies — don’t have a snowball’s chance in his final destination of passing the millionaires’ club and won’t work anyway.

      The prospects for transformative change appear downright impossible, given Lance Taylor’s admittedly necessary “real social consensus”. In an age of universal deceit, when the art and science of propaganda has gone beyond even Orwell’s imagination, it looks quite hopeless indeed. It’s pitch black with no sign of dawn on the horizon.

      But then, here comes Greece, showing that when the wheels come off an unsustainable debt built upon debt peonage system, and the social misery inflicted by neoliberal feudalism becomes deep and wide enough, change suddenly becomes possible … IF there are leaders with vision and faith to rally that essential consensus. This is why Naked Capitalism is so vital. It keeps the lamp lit, ready for dry kindling.

    1. Philip Martin

      Revolution, ala Russia, 1917, or (less revolutionary, as ballots were used) or Germany, 1932-33. Take your pick.

      The rich will never get ALL the money, as they will need not just servants, but professional services as well, such as accountants, pilots for private jets, entertainers, doctors and morticians. So that will create a small “middling class,” but everyone else would essentially be poor. This is akin to the social system that prevailed in England in the 17th century, but without the escape valve of the North American colonies.

  4. Mark Alan

    Economists continue to sidestep the major barrier to reform: corrupted political systems in The U.S. and the world. The regulatory systems that would have prevented so many mergers or prosecuted for so many crimes no longer exist. Governments today broadly conduct their actions for the purpose of directing more GDP to the largest business, specifically to their owners. The men who control these companies have been working in concert such that the greatest return on investment these companies make is from their political donations. Economic and political power is now concentrated within the richest segment of the population. Every branch of our government is largely corrupt in this respect: they no longer respect to precedents and values of our post New Deal society. And rolling back the societal advancements made through the values of the Roosevelts and democrats prior to Reagan is their unifying mission.

    Political reform and restoring a regulatory and judicial system to serve the general welfare, not the rich, are what must happen to alter the course of inequality.

  5. Michael Hudson

    The INET article focuses on capitalists vs workers. That’s one reason why stopped teaching at the New School where Lance Taylor is. They — and this article — actively oppose thinking of inequality in terms of (1) creditors vs debtors, and thus miss the debt problem; and (2) they ignore rent-seeking vs. productive investment.
    what appalled me was that Economics Dept. chairman Heilbroner, when I was there, thought that his view of the world in terms of capitalists and wage workers was the entire economy — no rentiers, and no financialization of rent-seeking.
    The “left” has left these topics entirely to “the right.” Bizarre.

    1. James Levy

      I studied Political Economy but in the PoliSci Department under Herman Schwartz (with nice input from Gunseli Berik and Stephen Eric Bronner) when I got my MA back in the late 1980s. Everyone there seemed obsessed at the time with “rigor” and “respectability” and “dialoging with the mainstream” (and if you were Vartan Gregorian or Ira Katzneslon or Alan Wolfe this worked out great). They appeared to desperately NOT want to be looked askance at by the men and women they all went to Ivy League schools with. I argued that it would be better, given their resources, to be the 1st best alternative program in the country rather than the 150th best conventional program, but careerism and personal psychology won the day.

    2. Annie DiPiombo

      Not all that surprising given that INET is both funded and run by folks from the high end of the financial sector.

    3. Rosario

      Unfortunately this is true among many in the progressive (left) community. Stuck in the romance and common cause of early 20th century industrial workers. This is an issue I have attempted to bring to the fore on many occasions with progressive friends only to receive the same tired platitudes. Irony is, many self proclaimed progressives participate in the rentier model of Capital extraction/exploitation without realizing it. Late stage Capitalism is a code left undeciphered by many on the left and it is to their peril.

    4. Marko

      Oh yes , INET and the left never talk about debt , or rent-seeking , or financialization. I don’t know how they managed to let this video get past the censors :


      … and I wonder why they feature and fund people like Steve Keen and Adair Turner , who rail incessantly about the dangers of debt-led economics :



      …. and , yes , the NERVE of Lance Taylor , in only discussing income and its distribution. Oh sure , he may have added value by pointing out that the small-ball changes in taxation and such that are being proposed will do little to prevent the continued upward distribution in income and wealth , but if he didn’t also tackle the other part of the debt/income ratio , well , then it was all for naught.

      Yep , let’s dismiss them all. Divide and conquer , that’s the strategy. That’s how we’ll win.

      We being the 1% , of course.

      1. Yves Smith Post author

        Wow, that is astonishingly ignorant comment. Turner’s first speech at an INET conference was a blistering attack on Big Finance, its use of complexity to mask risk, and how most if not all of the growth of credit in advanced economies was largely about rent-seeking and not about facilitating growth. He’s said similar things in somewhat wonkier terms in other venues and in reports where he was the lead of the effort. And other INET-funded research, and panels at INET conferences, have discussed the problems of financialization and excessive debt. It was the big focus of the second INET conference at Bretton Woods.

        You are either too lazy to look up what Turner has actually said and written and are going on your class bias and his pedigree, or worse, you are flat out intellectually dishonest. And your comment about Taylor amounts to shooting the messenger. He said clearly that the Vichy Left solutions offered by Summers and Piketty aren’t remotely adequate to fix the problem, and it’s extremely hard to solve the problem political at all with so much wealth shifted to the top rich, no matter HOW you go about it. But no, you’d rather not hear him say he recognizes the magnitude of the problem and is calling out phony solutions.

          1. Yves Smith Post author

            Really really REALLY sorry, I’ve been running on no sleep this week covering Greece, and as a result, I missed that you were being ironic. I read you as agreeing with Hudson. And I’m also shorter fuse than usual.

            1. Marko

              No sweat , Yves. When I’m tired my sarcasm detector often malfunctions , and my fuse shortens dramatically.

              You undoubtedly work too hard , but for entirely selfish reasons , I hope you keep it up. ;)

    5. Yves Smith Post author

      I disagree. The explosion in household borrowing started a full two decades after wages stagnated. Greater access to credit was a political solution that allowed for the appearance of a rising standard of living, PARTICULARLY bigger houses, that required more stuff to put in them. You have the causality backwards.

      Worker wages stalled out in the mid 1970s. You saw modest growth in household credit to GDP in the 1980s, which went pretty much back to its prior level in the nasty 1991-1992 recession, a somewhat more rapid rise in the 1990s, and an absolute explosion starting in 1999.

  6. E Forster

    How do companies and their employees derive their income if not wholly out of the pockets of individual consumers at the end of the supply chain? All the taxes incurred in supplying goods and services can only be paid out of that income. The end consumer necessarily bears a very high proportion of the cost of government and all the other “taxpayers” engaged in supply are merely intermediaries in the process of delivering the tax raised by the back door from consumers to government.

    It is clear that the progressive taxation supposedly offered by taxing the supply chain only ends up as a system in which every consumer, whether rich or poor, pays the same average rate of sales tax implicit in every retail purchase. It is no better than a single rate of retail tax applied explicitly on every purchase, except, of course, the voter is completely in ignorance of the true extent of the burden he personally suffers to fund big government, and, politically, ignorance is bliss.

    1. Carlos Fandango

      Yet the rich man is paying a much lower percentage of his income than the poor man and receives all the profit too … Ignorance is bliss.

  7. Jackrabbit

    What Larry Summers doesn’t tell you is this: The system is broken and it’s a run away train because rather than try to fix it people like Summers will help the looters right up to and thru disaster.

    When he decries ‘secular stagnation’ he doesn’t say from whence it comes NOR to where his bubblicious solutions will lead. ‘Secular stagnation is an agency-free, made-up term for: ordinary don’t make enough money. And Summers’ ‘solution’ – to blow bubbles – will only exacerbate that because the financial elite suck out money from active markets.

    Smoke an mirrors. That is what neolibcons like Summers do and will keep doing. Summers and Krugman ARE NOT ECONOMISTS as much as they are political operatives and hired guns.

    When will economists stop allowing their profession to be hijacked in this way? When will duplicitous, aid-and-abet politicians and economists be called out for the harm that they do instead of being lauded for how well they sell us out?



    H O P

  8. Jeremy Grimm

    I thought we once had a progressive tax system that worked reasonably well to maintain at least a more equitable sharing of income and wealth in our society. Given the ills more than apparent in our present system, how is it anything but conservative to push for a return to the old way of doing things. We could return to a pre-Clinton tax rate, or a pre-Reagan tax rate. I think it’s very conservative to return to taxing estates. If any adjustment is needed, the IRS should keep better track of the current rate of inflation as it impacts their tables.

    All arguments about putative negative impacts of that old tax system on innovation and entrepreneurship should long ago have dispelled themselves in realities. Not only have we enjoyed little or no innovation and entrepreneurship as a consequence of the current regime, quite the contrary has occurred. Innovation and entrepreneurship has been stifled as large firms combine with larger firms to control “markets” for consumers, for investment capital, for new ideas and innovations. Mom and pop business is all but strangled to death; innovation dies before it reaches the market; older smaller businesses are bought up at fire-sale prices and main street puts out space to let signs.

    How much baloney do we have to consume to finally figure out we’re being fed baloney?

  9. Jacob

    “LP: So what’s to stop us from becoming a Downton Abbey society?
    We’ve got to have a real social consensus that the way things are going is dangerous and unacceptable, and an understanding that it will take seriously progressive taxation to make a dent in the problem. But I am not optimistic about the prospects.”

    The sure way to obtain a consensus for drastic change of the status quo is to take away the entitlements that keep most people at least semi-contented with the way things are. Remove their Social Security, privatize their roads and streets and make them pay sales taxes on all purchases, including food, education and healthcare so that the government will be supported completely by the common people’s taxes, not the rich. FDR was a “oner,” a remarkable person the likes of whom we will never see again, so I expect removal of all the entitlements and a big increase in the size and power of the police state which is necessary to keep the people under control as their entitlements are gradually removed.

  10. Sbengineer

    The author seems to be wondering why CEO & Entertainment incomes skyrocketed after 1980. Reagan Decimated the higher tax brackets. Instead of company perks, CEO’s could now take monitary compensation without paying 70, 80, or 90% tax.

  11. Jack King

    “……it will take seriously progressive taxation to make a dent in the problem.”

    The top 1% already pay 38% of all income taxes.
    The top 10% pay 70%
    The bottom 50% pay 3%

    Not clear how it could be more progressive. You could, of course, raise the top marginal rate to 90%, but you would then find the rich cutting down on investments, except tax free munis. There will certainly be less risk taking which will ultimately hurt the lower incomes.

    And here is an interesting factoid to chew on. As poverty decreases, income inequality increases. Since 1820, the global Gini Coefficient has risen 30%. During the same period, however, poverty fell drastically. More currently, between 1980 and 2005, the Gini increased in 80% of the OECD nations as well as Russia and China.

    1. M Warhurst

      Dear Jack King:

      Your claimed tax structure is NOT where we are at, it IS the place we need to be. The wealthiest 1% pay almost zero taxes. I have no idea what world you may be referencing, but in this world the top 1% have offshored 90-99% of their incomes or have taken advantage of the insanely tiny taxes on corporations and on corporate dividends. Ditto for the top 10%. When all taxes including consumption taxes are figured in the bottom 50% pay the vast majority of taxes. You may have noticed that when factories close up the local, state/provincial and federal taxes go way down, that’s because factory workers pay such a high percent of their income in taxes and their taxes comprise such a high percent of all taxes.
      I am sure you aren’t an idiot so that means you are either gullible enough to pay attention to FOX not-the-news and Wall Street generally and consequently you fervently believe that hot smelly stuff that the corporate MSM and their paid off pseudo economists and empty talking heads proclaim as mana.

      1. Jack King

        The data I mined is from the IRS (2012…the latest figures available). Yes, there are a very few who park money offshore or the data would be even more skewed. Tax avoidance is a natural reaction…and legal. Your claims are wild eyed conspiracy stuff akin to Area 51. And the top 10% also are offshoring?! Do you realize you are talking about annual incomes of around $125k? What is the OBJECTIVE source where you are getting this from? Yes, there are other taxes that are not progressive. Sales taxes, liquor taxes, cigarette taxes, property taxes, gasoline taxes, etc etc etc…the list is endless. That giant sucking sound are 50 state governments with their hands in your pockets. Do some states overdo it? You betcha. That is precisely why there is a mass migration from high tax states to low ones.

        As far as corporate tax rates, they are 39%, or the highest in the developed world (OECD average is 25%). Yes there are a few big corporations who have worked the taxcode for loopholes, but the vast majority of business in the US is conducted by small-mid cap companies who have to pay the full freight. The upshot is that companies move away. We have seen this trend for years on the state level…companies moving from high tax states to low tax right-to-work states. Now that trend is continuing by moving their operations off-shore. Jobs are going with them. There are two things you can do to address this. You can pass more laws and try and make it more difficult for businesses, or you can lower taxes and have more business friendly policies…and watch the jobs coming back.

        1. MikeMcMack

          Jack, the data you’re quoting is grossly misrepresented. Im not bashing you personally, its all over the literature and articles. The top 1% of wage earners is NOT the top 1% we’re talking about adjusting taxes on. (Sorry for yelling). The top 1% wealthiest individuans and families, the billionaires who most certainly do park money outside the country, e.g. Mitt Romney level of wealth, either to get out of paying taxes, or to pay lower taxes, are not “wage earners”. If you look at the wages of the top 1% of *wage* earners, they are in the 300k to 500k range, by state. This group most certainly does pay a lot of taxes, and there is not a lot to gain by taxing this group more. If you go above that, to the people who live on, say, hedge fund managers income or capital gains, go back and read again what Warren Buffet said about his tax rate vs his secretaries tax rate.

          1. Jack King

            “The top 1% of wage earners is NOT the top 1% we’re talking about adjusting taxes on”

            Nope. The data is taken straight from the 1040…..Line 7 (wages)..Line 8a (interest)…Line 9a (dividends)….Line 12 ….(business income) from Sch C….Line 13 (capital gains)….Line 17 (rental income)…. Line 21 (other income).

            In 2012 the top 1% was anyone who had income > $465k. The billionaires (e.g. Warren Buffett) are the 0.01%

            As far as your comment on corporate taxes, that is precisely what I said. And I, and most corporations would be tickled pink with a 25% tax rate with closed loopholes.

        2. MikeMcMack

          Jack, the 39% number is again a gross misrepresentation of what is going on in the USA. First, yes, the 39% number is the statutory rate. The problem THE problem, is that the larger the corporation, the farther below 39% they actually pay. Go look at GE, Bank of America, Google, etc. Very many large corporations paid zero in federal taxes, using various games, while the smallest corporations, small local businesses who do most of the hiring, pay the full 39%. What we need to do, and it won’t get done, is to set the rate at 25% with greatly reduced writeoffs. It won’t happen becauese the most wealthy people, far above hte 1% wage earners you quote, don’t want to pay anything.

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