Are the 1% to be Blamed – Fortune Says No!

The April 30, 2012 issue of Fortune includes an article by Nina Easton titled “Don’t blame the 1% for America’s pay gap.” The piece was published on line by CNN. The primary thesis seem to be an exoneration of the 1% by saying that they are “a group of hard-driving workaholics who tend to have advanced degrees and bring a level of talent and skill to their jobs that attracts premium pay…”

This is just one angle at which to view the problem. What is missing in that analysis is that that the primary question is not how they got to be the 1%, but having reached that point are they claiming too much of the income pie? Are they making too much? Are they greedy? These questions go unanswered as if by being hard working these other questions are irrelevant.

This thesis is then justified by an analysis that is very much one dimensional and therefore very shallow. While claiming to recognize the complexities of the reasons for the growth in income inequality over the last thirty years Nina Easton very much simplifies the situation, presenting incomplete and irrelevant pieces of information. She does this while attempting to convey an aurora of understanding the feelings of the 99%. Her reasoning behind the existence of a pay gap is valid, but the analysis does nothing to look at explaining the size of those differences. In fact it trivializes the income gap that now exist.

She starts by recognizing that measures of income inequality are the largest they have been since 1929. By her admission the 1% control 24% of income in 2007 and has dropped back to 17% in 2009 in the midst of the current recession.

Her first salvo is aimed at the working class where she to notes that “Wages of men without college diplomas, for example, have dropped by a whopping third over the past three decades.” She goes on to argue that “the financial rewards of higher education are a big contributor to the income gap.” Here she uses work by Harvard’s Lawrence Katz who has shown that “even if all the gains of the top 1% were redistributed to the 99%, household incomes would go up by less than half of what they would if everyone had a college degree.”

There are major problems with this approach as the numbers she uses are largely meaningless and not relevant to the situation. She needs to be telling the whole story, not just making a comparison that seem to bolster her arguments.

Men without college diplomas make up a very different group now than they did in 1982. The US Census Bureau has a wealth of data on historical levels of educational attainment. Educational levels have not been stagnate over the last thirty years. In 2011 the Census Bureau reports that 30.4% of people 25 and over had a college degree, while thirty years earlier this number was 17.1 percent. As a result Easton has ended up comparing incomes for very different groups as if they were identical. Those changes cannot be ignored. She has in essence compared the incomes of the lowest 69.6% of those over age 24 in 2011 to the lowest 82.9% of those over age 24 in 1981. An accounting needs to be made for the differing educational levels between 1981 and 2011. Educational levels needed to achieve higher incomes in 1981 are not the same as those needed to achieve higher incomes in 2011.

The second fault Easton and Katz make is in presenting a meaningless number as if it were relevant. A claim that spreading the 24% of income controlled by the the 1% over the 69.6% of those without a college degree should be compared to the extra money that group would make if they had gotten the college degree is absurd. If everyone in the country suddenly obtained a college degree the is no data on what that would do to the income distribution. Their income would not suddenly magically go up by their share of the 24% of gross income or by any other number one chooses to focus on. Someone still needs to do the jobs those people are doing now. There is no indication that anyone is going to pay them more to do the same job.

The fundamental assumption that Easton makes is that the anger is directed at the 1% because they are the 1%. No, rather the anger is focused on size of the income differences. There will always be the 1% and they will always claim a larger share of the income pie. The current 1% may well be the current focus of the anger, but their income levels are the cause of the anger.

Easton goes on to say “Income is not a zero-sum game: The rich aren’t getting wealthier at the expense of the poor.” Income may not be a zero-sum game, but all the “extra” income received by the 1% is not created out of thin air. It is created as goods and services are produced in our economy. A CEO in the 1% may well bring in a extra hundred thousand dollars in income. He could have given that money to those who work for him. Then it could be said he gave the money to the poor. But he may use that money to buy an expensive yacht and thus create a job for someone who would have been unemployed. Here rather than providing for his employees he, by his consumption, provides a job for the someone else to build that yacht. By that logic the CEO took from the poor to give to the poor. But wait a minute. Had he given that same money to his employee that employee might have bought a new dishwasher and created a job for someone who was unemployed. In both cases income is created as goods are produced. But there is a difference in how the money is distributed. In one case the CEO lives in greater luxury while his employees remain poor, in the other some of that money is shared among his employees who otherwise would have all been making less. In both cases additional jobs are created. But where did that extra hundred thousand dollars come from in the first place. Likely the CEO was charging more than he needed to for his products and thus taking money from the poor at the start of the cycle. The economy is not always simply described. Complexities abound. It is easy to make whatever case here the author wants to make, especially when there is not data available to know what actually would happen.

Easton waits until the end of her article to start getting things right. It it very true that the growth of two earner families, especially where both earners have a good education, has contributed to the growing levels of income inequality. The higher divorce rates, and growth in single parent families have also contributed to the trend. It is here where many of the measures of income inequality fail to reflect the true economic situation since by counting either families or households they fail to account for changes over the last 30 years in the structure of families in the United States.

But Easton’s suggestions for working toward solutions are weak and in many cases impractical. She suggests “we should figure out what the 1% is doing right — and apply some of those ideas to closing the gap.” Would she suggest that the 45 year old woman with three kids and a high school education whose husband has abandoned her should have married someone else and gotten that college degree 25 years ago? At that point in her life emulating many of the strategies of the 1% is not very realistic. A problem is not solved by telling someone they should have acted differently 25 year ago.

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