Are The 1% Really Undeserving?

Raghuram Rajan Project Syndicate November 10, 2011

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The Undeserving One Percent?

CHICAGO "“ It is amazing how the "one percent" epithet, a reference to the top 1% of earners, has caught on in the United States and elsewhere in the developed world. In the United States, this 1% includes all those with a 2006 household income of at least $386,000. In the popular narrative, the 1% is thickly populated with unscrupulous corporate titans, greedy bankers, and insider-trading hedge-fund managers. Reading some progressive economists, it might seem that the answer to all of America's current problems is to tax the 1% and redistribute to everyone else.

Of course, underlying this narrative is the view that this income is ill-gotten, made possible by Bush-era tax cuts, the broken corporate governance system, and the conflict-of-interest-ridden financial system. The 1% are not people who have earned money the hard way by making real things, so there is no harm in taking it away from them.

Clearly, this caricature is based on some truth. For instance, corporations, especially in the financial sector, reward too many executives richly despite mediocre performance. But apart from tarring too many with the same brush, there is something deeply troubling about this narrative's reductionism.

It ignores, for example, the fact that many of the truly rich are entrepreneurs. It likewise ignores the fact that many of the wealthy are sports stars and entertainers, and that their ranks include professionals such as doctors, lawyers, consultants, and even some of our favorite progressive economists. In other words, the rich today are more likely to be working than idle.

But what might be the most important overlooked fact is that the rise in income inequality is not just at the very top, though it is most pronounced there. Academic studies suggest that the top tenth percentile of income distribution in the US, and elsewhere, is also moving farther away from the median earner. This is an inconvenient fact for the progressive economist. "We are the 90%," sounds less dramatic than "we are the 99%." And, for some of the protesters, it may not even be true.

Perhaps most problematic, though, is that something other than plutocrat-friendly policies is largely responsible for the growing inequality. That something is education and skills. True, not every degree is a passport to a job. Freshly-minted degree holders, especially from lower-quality programs, are finding it particularly hard to get a job nowadays, because they are competing with experienced workers who are also jobless. Nevertheless, the unemployment rate for those with degrees is one-third the unemployment rate for those without a high school diploma.

Close examination suggests that the single biggest difference between those at or above the top tenth percentile of the income distribution and those below the 50th percentile is that the former have a degree or two while the latter, typically, do not. Technological change and global competition have made it impossible for American workers to get good jobs without strong skills. As Harvard professors Claudia Golden and Larry Katz put it, in the race between technology and education, education is falling behind.

To acknowledge the fact that the broken educational and skills-building system is responsible for much of the growing inequality that ordinary people experience would, however, detract from the larger populist agenda of rallying the masses against the very rich. It has the inconvenient implication that the poor have a role in pulling themselves out of the morass. There are no easy and quick fixes to education "“ every US president since Gerald Ford in the mid-1970's has called for educational reforms, with little effect. In contrast, blaming the undeserving 1% offers a redistributive policy agenda with immediate effects.

The US has tried quick fixes before. Income inequality grew rapidly in the last decade, but consumption inequality did not. The reason: easy credit, especially subprime mortgages, which helped those without means to keep up with the Joneses. The ending, as everyone knows, was not a happy one. The less-well-off ultimately became even worse off as they lost their jobs and homes.

The US needs to improve the quality of its workforce by developing the skills that are relevant to the jobs that its firms are creating. Several steps can be taken towards these goals, including improving community attitudes towards education, reforming schools, tying the curriculum in community colleges and vocational institutions more closely to the needs of local firms, making higher education more affordable, and finding effective ways to retrain unemployed workers.

None of this is easy or likely to produce results quickly, and some of it may require more resources. While eliminating inefficient spending, especially inefficient tax subsidies, can generate some of these funds, more tax revenues may be needed. The rich can certainly afford to pay more, but if governments increase taxes on the wealthy, they should do it with the aim of improving opportunities for all, rather than as a punitive measure to rectify an imagined wrong.

Raghuram Rajan is Professor of Finance at the Booth School of Business, University of Chicago, and author of Fault Lines: How Hidden Fractures Still Threaten the World Economy.

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Username Password New registration Forgotten password tcolgan001 05:16 10 Nov 11

That $386,000 figure is an error. Perhaps it came from here:http://www.nytimes.com/interactive/2011/10/30/nyregion/where-the-one-percent-fit-in-the-hierarchy-of-income.htmlThis is the cutoff for the top 10%. The top 1% make over $2 million per year.

krkovach 05:18 10 Nov 11

There is no denying that the tax rate on the top 1% or 10%, whichever number you want, has fallen dramatically since 2000. I don't disagree with the major points you make but having no social security tax over 100K, 15% long term capital gains rates and the changes in the tax rates over 100K which was 39.6% in 2000 and is now 28%, 33% or 35% depending on income is extremely generous in a time it is borrowed money.

bluebob1 06:09 10 Nov 11

This article is misleading on several basic points. First, based on the recent non-partisan analysis of the Congressional Budget Office, the main reason for the growth in inequality is that the top 1% has dramatically pulled away from others. The CBO analysis clearly shows (see, e.g., "summary figure 2") that the shares of income going to the bottom four income quintiles have fallen since 1979, whle the share on income going to the 81st through 99th percentile have stayed the same. The only share that has risen is that of the top 1%.

Second, within the top 1%, the main driver has been the rising incomes of the top 0.1%. For example, the Center on Budegt and Policy Priorities (http://www.cbpp.org/cms/index.cfm?fa=view&id=3309) estimates that the real average income gains of the top 0.1% during the last economic expansion (2002 to 2007) was 123%. It was 4% for the lower 90% of the distribution and 62% for the top 1% (which is skewed due to the top 0.1%). The top 0.1% is primarily the super rich hedge fund managers and CEOs of large corporations, not "entreprenuers."

Third, the claim that educational differences account for the growing inequality is simply wrong. The so-called college premium (difference in earnings between those with only a college degree and those with only a HS degree) grew in the 1980s, but has been relatively flat since the early 1990s. So while educational differences can partly explain why some people have a higher LEVEL of income than others, it cannot explain why inequality has GROWN so much.

This information is readily available and I find it hard to believe that the author did not know these basic points. When will professors from the University of Chicago stop defending gross inequality at all costs and creating a casino economy and use their knowledge for the common good?

Alternative 06:50 10 Nov 11

Many of the truly rich are heirs of ... or entrepreneurs. Those who are poor should question themselves why they are poor. Better schools? Come on, the internet offers all you need to study whatever you can think of. The problem is not the rich nor the tax system, the problem is the lack of dynamism of a great part of the population that prefers to spend its time before TV. You get what you work for and there are opportunities enough in the US. More than 5 billion people elsewhere on the planet can dream of.

Linden 07:05 10 Nov 11

One would expect there to be jobs a plenty in the higher skilled sectors according to this account, but that isn't the case. One of the challenges that developed countries face is that their economies are not geared for job creation, partly because the financial sector, at least in the UK, has asset stripped productive industries and pocketed the gains.

AUTHOR INFO Raghuram Rajan Raghuram Rajan, a former chief economist of the IMF, is Professor of Finance at the University of Chicago's Booth School of Business and the author of Fault Lines: How Hidden Fractures Still Threaten the World Economy, the Financial Times Business Book of the Year. MOST READ MOST RECOMMENDED MOST COMMENTED The Instability of Inequality Nouriel Roubini The Globalization of Protest Joseph E. Stiglitz Milton Friedman's Magical Thinking Dani Rodrik The ECB's Battle against Central Banking J. Bradford DeLong America at Stall Speed? Mohamed A. El-Erian A New World Architecture George Soros America's Political Class Struggle Jeffrey D. Sachs Did the Poor Cause the Crisis? Simon Johnson To Cure the Economy Joseph E. Stiglitz No Time for a Trade War Joseph E. Stiglitz The Globalization of Protest Joseph E. Stiglitz The People versus the Police Naomi Wolf The End of Population Growth Sanjeev Sanyal Does Redistributing Income Reduce Poverty? Jagdish Bhagwati The ECB's Battle against Central Banking J. Bradford DeLong ADVERTISEMENT PROJECT SYNDICATE

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Are The 1% Really Undeserving?

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