Disallowing extreme income inequality

This will be a very short post on the way the US used to not allow extreme income inequality during the Golden Age of Capitalism.

The idea was quite simple: Going into WWII, income tax rates on the highest bracket  reached levels around 90% which meant that wage earners had little incentives to increase their annual income above the highest bracket. At the same time, that bracket was set at 100 times the lowest bracket:

The latter was at least 1.5 times personal income per capita although it reached even close to being 3 times larger. The very high level of the top income tax rate remained roughly constant for two decades (40’s and 50’s).

That meant that the highest income allowed was somewhere between 150 and 280 times that of average personal income depending on the specific year. As a result, extreme inequality was reduced through tax incentives. This is in contrast to today when CEO pay hovers around 300 times that of the typical worker:

It is quite evident that fiscal (and more specifically tax) policy can be used as a tool for a society to place specific limits on the level of extreme inequality allowed within it.

Jordan Peterson on income inequality

Jordan Peterson is a clinical psychologist who’s earned his fair of publicity in recent years, especially through videos of his lectures and speeches on Youtube. Personally, I have found the views expressed on his videos quite helpful and inspiring while his lectures contain a ton of useful information and methodology on how to address life (I especially recommend the Biblical Series).

On the political front, it is clear the Dr. Peterson leans to the right and has been highly critical of far-left and Marxist views. Nevertheless, he makes a solid exposition for the necessity for both broad political parties with the right focusing on personal effort and values, order (which allows people to cooperate and plan for the future) and hierarchy of competence (implying equality of opportunity but not of outcomes). The left on the other hand tends to focus on classes instead of individuals, inequality (which is ultimately a destabilizing force) and change which attempts to balance out the fact that the economic games tends to work like «Monopoly» with most people stacking up at zero and a significant few acquiring almost all the wealth.

In a recent video he analyzes a film by «Future Majority», a team of Democrats trying to bring about change in the political landscape in favor of the working class. Dr. Peterson is especially critical of the main part of  the video which describes the surge in inequality during the last decades. In his own words, he considers this to be the weakest part of the film and that the inclusion was an error.

In my view, this is actually the stronger and most important part of the film and what distinguishes the creators politically. The part in question describes how incomes (for the lower and middle class) have stagnated for decades, how CEO compensation has skyrocketed when compared to worker wages and how almost all of the recovery since the Great Recession went to the top-0.1%.

What I especially like about this part is that it mainly analyzes the inequality problem in relative (rather than in absolute) terms and across time. CEO compensation is compared to their own workers wages and working class income to where it was decades ago. The important part is that the data are absolutely real.

The ratio of CEO to worker compensation has actually increased ten-fold in recent decades:

while the bottom-90% has not seen any actual increase in real income since 1980!

Dr. Peterson basically states (and assumes) that income is mostly earned honestly through hard work with only a small minority being the result of exploitation or counter-productive endeavors. So it seems that CEOs earning 300 times average compensation (instead 30 times during 1980) is the result of exceptionally high productivity and work while the bottom-90% is just not being any more productive for almost 40 years now.

What is missing from the analysis is the fact that work/income outcomes are not only the result of personal choices and work but also of class negotiation power. Worker power will depend on the state of the business cycle (and the level of unemployment), union density and power, outsourcing threats, import penetration (which embody foreign labor acting competitively to domestic labor), the level of sectoral competition (which determines to what point a company will actually act as a monopsony) and a host of other factors.

Since 1980 unemployment has mostly been above the «natural level of unemployment» with only the second half of the 90s accounting for an actual high-pressure economy:

union density fell from 27% in 1973 to 19% in 1986 and 11% in 2011 while the real minimum wage (which mostly determines the floor for the bottom-20% income) has never increased above 85% of its 1980 level:

Even increasing educational attainment has not really helped workers since only post-bachelor degree college education has posted steady increases in weekly earnings. Apart from an increase during the second half of the 90’s (when the economy was allowed to run hot) the rest of the college level education earnings have been flat all the while student loans outstanding have climbed to a total of 1.5tr $.

In my personal view, Dr. Peterson has allowed his own political views to cloud his analysis of income inequality. It seems that he clings to a stereotype where any actual exposition using hard data of the problem is a manifestation of resentment towards the hard-working wealthy instead of the first step of trying to determine and solve the problem. In so doing and especially by insisting that the film should not have included a section on inequality in the first place he appears to make the case that thinking and analyzing inequality has no value and wealth and income are only the result of personal choices, competence and hard work. Given that the Democrats voter base is within the bottom-90% working class it seems quite strange to insist on not really focusing on income inequality at a time when the working class has not been able to see its real income rise above 1980 levels.