Blaming bankers and proposing revolution is one of those explanations that sounds satisfying but doesn’t really match the evidence. In some ways, as markets have become more efficient and transparent it becomes harder, not easier, for finance people to simply squeeze money out of the systems through financial tricks. We’re also living in a world where interest rates are at historical lows, making the cost of capital almost negligible for anyone with a good idea. The downside to taking this capital is that you’re giving away upside, but that’s not exactly a secret.
The bigger factor is that per-worker productivity is amplified immensely by technology. Historically, businesses needed to scale their employee base nearly linearly with the number of customers. If you were in the business of building houses or growing produce, your economies of scale topped out early. If you want to serve more customers, you have to hire more people to do the work.
In the technology era, the marginal cost of additional customers is minuscule. Netflix has to pay marginally more for bandwidth and licensing fees with each additional customer, but the number of employees necessary to support a growing customer base is minuscule. Even physical goods can have automated production as they scale up, so physical workers are less and less necessary as scale grows.
For the jobs that remain, supply and demand still dominates the equation. Engineer salaries have been pushed upward because demand for engineering work exceeds supply. Factory worker salaries have been flat or gone down because demand for [domestic] manual labor is decreasing, meaning more people are willing to work for lower compensation just to take those jobs.
Try as they might, the financial people can’t simply break the laws of supply and demand. If they try to keep so much of the profits that their wages fall below other companies, employees will simply leave for higher paying jobs. If the company raises wages so much that they need to charge customers more, their customers will simply leave for lower cost competitors.
This behavior is more intuitive when you put yourself in the shoes of the decision makers. If you called a plumbing company to fix your drain and they quote you a price 2X that of the competitor but claim that it’s because they pay their plumbers more, are you going to gladly take it? Or would you just call any number of alternatives that will charge you market rate costs? (If you are among the few who would gladly pay more for the same service, ask yourself how the general population would behave)
Something is driving down wealth at the low end while driving it up at the high end. It seems unlikely in the extreme that this a reflection of actual value produced by people at the high end relative to those at the low end. Much more likely is that this is a reflection of some kind of structural problem in the system that is being perpetuated by the people at the high end using the political power that being at the high end affords them. Whether those people are "bankers" or are better described by some other label is kind of irrelevant. It's the overall dynamic that matters.
I think it is more accurate to say that wealth growth at the low end is not as rapid as wealth growth at the high end.
Nothing is driving wealth down. Wealth is increasing for everyone, generally speaking. This observation is important because it recognizes that wealth is created, not allocated. This is not a zero-sum game.
You say it seems unlikely that actual value is increasing at the high end but I do not think this opinion holds up to scrutiny. I think it is very likely that value at the high end has increased by multiples -- white collar jobs have become vastly more productive with the introduction of technology. Correspondingly, low value work has not. In fact, many of our most common low value jobs (retail, driving) risk going the way of the switchboard operator. There was no conspiracy to devalue the work of the switchboard operator; rather, so called "high value" tech jobs made this type of lower value work entirely obsolete.
I think it is unsurprising that high end work is rising in relative value while low end work is falling. I don't see any basis for imagining political or economic conspiracies: What we see in terms of value is exactly what we ought to expect.
and note that the net worth of the top 1% has been increasing more or less monotonically for the last 30 years, with only a very small dip in 2008-2012.
The bottom 50% take a much bigger share of the losses and a much smaller share of the gains. Over the last 30 years the bottom 50% has barely broken even.
These charts aren't showing wealth, they're showing money. Money is not wealth.
For example, suppose you have a car that you paid $20K in cash for this year. That works out to about $10K 30 years ago (I think the Fed charts you showed are in inflation-adjusted dollars, though they don't say so). So as far as monetary vaue is concerned, you have the same net worth in your $20K car today as a person 30 years ago would have in a car that cost $10K then. (Or even a car that cost $20K then, if we aren't adjusting cost for inflation.)
Having owned cars over this entire time period, however, I can tell you that the wealth contained in that $20K car today is quite a bit greater than the wealth contained in a car that cost $10K 30 years ago. A $20K car today will be more reliable, get better gas mileage and give better average performance, have numerous safety features that didn't even exist 30 years ago, and have more bells and whistles in general. So in terms of wealth, I'm quite a bit more wealthy with $20K worth of car today than a person 30 years ago would be with the same inflation-adjusted monetary value of car.
And cars are actually a pretty poor example as compared with, say, computers or phones.
You may be surprised to hear that economists are well aware that consumer goods have improved over time, and even explicitly adjust for it when calculating inflation [1].
They do this in the Consumer Price Index, yes. But that's not the same as doing it in all the analyses that are claimed to show wealth inequality. Not all sources define "inflation" the way the CPI does.
Also, even in the CPI, they don't do "hedonic adjustments", which is what you are describing, for all goods. For example, I mentioned cars and computers; the only adjustments made for those items are "cost based adjustments". And many items don't even get those.
Then there's the question of whether the methodology they are using for making "hedonic adjustments" where they are making them actually captures what it claims to capture, which is, to say the least, not something everyone agrees on.
Yes, cars and computers have gotten cheaper relative to their quality. So what? Health care and education have gotten more expensive. Inflation-adjusted money is a pretty good proxy for wealth. What else is there?
> Health care and education have gotten more expensive.
I think this depends on where you get your health care and education, but I agree that in many cases quality vs. price is certainly not where it should be.
> Inflation-adjusted money is a pretty good proxy for wealth. What else is there?
Not trying to centrally plan an entire country's economy based on faulty proxies for something that cannot be reliably measured [1]. Central planning just makes it easier for the rich to siphon more wealth from everyone else while disguising it as "helping".
For example, if we take your observation about quality vs. price for health care and education as true, and compare it to my observation about cars and computers, the general pattern is that the areas where quality vs. price is worst are the areas that are the most centrally planned, and the areas where quality vs. price is best are the areas that are least centrally planned.
([1] - The reason wealth cannot be reliably measured is that it's subjective; the value of a good or service depends on who has it and what use they can make of it. This is the only reason wealth can be increased by specialization and trade in the firt place.)
"Health care and education have gotten more expensive. "
I apologize because I don't mean to only present disagreements but I don't think this is true, either.
I think that like-for-like health care has largely fallen in cost. The catch with health care is that we've developed better (and much more expensive) methods. Spending has increased dramatically. My grandparents grew up on a farm and when they broke a bone they set it at home. They saw a doctor on very rare occasions and when they did, treatment was limited. Their health care spending was very small, but so was the scope of their treatment. When my grandparents got cancer, they died. There were not nearly so many expensive options available for end of life ailments.
It's possible to live with the same kind of spartan health care today, but almost no one would because we are fantastically more wealthy than past generations.
Willingness to buy more is exactly what we would expect to see if wealth has risen over time, as I am arguing. The status quo rises dramatically as overall wealth increases.
Education is tricky as it's largely a fashion product at this point. Knowledge itself is often freely available in ways impossible to imagine decades ago. It's the prestige and pedigree that cost money. Fashionable limited-quantity things get wildly expensive as wealth increases.
No, I don't think that it does. The bottom 50% generally do not have savings and investments - they invest their wealth in tangibles: Housing, food, belongings.
It is not meaningful to look at investments or savings as a measure of wealth when most people near the bottom do not and have never had those things. It's necessary to look at what does signify wealth in this class: Consumption and physical belongings.
For example, when we look at the average square footage of a home for the bottom 50% we see dramatic increases over the last century -- because wealth in the bottom 50% has had a dramatic increase.
I think we're seeing two conflicting trends at work. People have better and better consumables in their lives: always-connected pocket computers, cars with amazing safety systems that last much longer than before, and bigger rental apartments with amenities like air conditioning, cable TV and WiFi. At the same time, they are more and more likely to be living paycheck to paycheck with no savings, and no hope of owning their residence. The working class is simultaneously wealthier than ever before (pocket computers !) and poorer than ever before (can't afford to see a doctor !). What's undoubtedly true is that income inequality has grown dramatically in the US.
But they are not more likely to be living paycheck to paycheck. That likelihood has not increased. That is simply how most people live, and how they have AFAICT always lived.
Income is not the dominant factor in whether or not someone lives paycheck to paycheck. People live this way with startlingly high incomes.
I wouldn't dismiss so quickly that it's impossible for some people to create orders of magnitude more value than others, or for that distribution to change dramatically with time. In farming, for example, increased mechanization has allowed a ~100x increase in per-worker production, and unless literally every other occupation had the same change over the same time period, that should lead to dramatic productivity differences.
The real difficulty is in deciding who "gets credit" for producing a given thing. Is the person driving the tractor really more productive, or is the tractor itself responsible for producing most of the value (return on capital)? Maybe the bank that provided the loan for the tractor is creating value? Without any of those components, the food wouldn't be grown, so there's not an obvious way to divide it into the sum of individual contributions.
> The real difficulty is in deciding who "gets credit" for producing a given thing.
Exactly. The situation we currently have is that the people who are getting the most "credit" as you put it are by and large the same small group of people who make the rules for who gets the credit. "Bankers" is a convenient popular label for those people even though most of them don't actually work at banks.
I am reminded of Sagan's standard "Extraordinary claims require extraordinary evidence"
Has been there been any detailed breakdown of how much more effective the median CEO in 2020 is over the median executive in 1970? I am certain they are doing things better, have more data, etc but what scale are we really looking at here?
Because, just thinking out loud here, the bulk of the workforce in the United States is more educated and has more hard skills than their predecessors did in 1970s. Firms demanded technology skills, for which they provided little or no training, and their workforce was able to acquire the necessary skills.. and yet the "upside" was nothing more than possibly being able to keep their job.
First demonstrate that it's an extraordinary claim.
Effectiveness isn't the measure, exactly, it's how replaceable the CEO is, and the same is true of any employee. If everyone is more educated (and education may be nothing to do with what's required, incidentally), then people are still just as replaceable.
I have no good answers, as I definitely think there are pros and cons to modern executive teams, but it starts with replaceability.
You're in luck! This study has been done[0]... repeatedly. CEOs since 1978 have been found lacking. Think about it. CEO compensation has gone up 970% since then.[1]
The key takeaway is that that boards set the compensation based on the average compensation CEOs at peer companies, but performance isn't equally distributed. Essentially, the highest performing CEOs pull up the mean, and so the average and below average CEO compensation goes up.
It's not the CEO that became more effective tho, it's the money.
You can't do a Tesla without PayPal exit level of money, you can't do a PayPal without zip2 exit money and you can't make a zip2 without a real estate agent footing the initial bills
You could just punch income inequality into Google Scholar or Google Books and learn at least 100 ways capital concentration or poverty is perpetuated, via the natural experiments of many rich western countries and US states.
Don't read too much into this analogy, but if I search for Flat Earth I'll get a load of stuff that talks about how the Earth is flat, and not much else.
For example, you may not get the following explanation much, even though it requires no conspiracies and explains the outcomes: income is disproportionate because risk and capital are more important to a business' success than any particular individual's labour, and so they are correspondingly rewarded more as well.
Even if all bias were removed from life, any free meritocracy would still perpetuate it. People can choose to make less, and some people can't add as much value as others.
> Although the economy is a complex system and it's dangerous to try to over-simplify, my personal opinion is that there are two main and intertwined causes:
1) the cost to participate in the US court system.
2) the abuse of copyright, patent, trademark, and contract[1] law to divorce workers from their experience and treat employee knowledge as company property.
The time and money involved in both pursuing and defending court cases favors larger entities with armies of lawyers and large war chests. Intellectual "property" cases take especially vast amounts of resources because of the fuzziness involved. Meanwhile, treating workers as fungible producers of ideas that can be bought and sold both reduces the bargaining power of individual workers while empowering companies that can amass large portfolios of patents, etc. to use in litigation.
Not sure about reforms for the court system, but patent and copyright reform, combined with restrictions on unfair employment contracts, would go a long way to improving the situation.
The increasing share of GDP going to finance & tech makes sense if you posit that the economically rational thing to do is to destroy the economy and rebuild it. Tech is the industry focused on rebuilding it; finance is the industry focused on redirecting resources away from the old economy and into the new one.
Most humans have an aversion to death and destruction: we get attached to people, institutions, ideas, employers, basically things that we can count on existing. Economics doesn't care though. If a new way of doing things is more efficient than the old, the market will select for the new way, regardless of the human suffering it causes. And since most humans are averse to causing suffering, they won't be willing to capitalize on this opportunity, which leaves large opportunities available to those who say "To hell with institutions, there's a more efficient way and I'm going to bring it to the masses." They (and the SWEs, SREs, UX, data scientists, etc. who help them) then reap large windfalls as they cannibalize large portions of the economy and throw the now-useless workers out of work.
This model explains nearly everything about the past decade. The downside is that it suggests that "revolution" - rather than being an angry but illogical reaction of a few disgruntled workers - is actually an inevitable consequence of the destruction of the old society. Political systems are embedded in the economic realities that birthed them; change economic reality and the economically rational outcome is for those political systems to fall. The same thing happened as industrialization destroyed feudal empires and ushered in the era of nationalism.
I agree it doesn't make sense to blame bankers for exploiting the legal system that allows them to enrich the rich at the expense of the poor for a commission, other than the revolving doors between government and industry and lobbying efforts to maintain our broken society the way it is.
There are numerous financial products and services available to only the wealthy that reduce tax burden and increase wealth and income that are inaccessible to anyone else, create little value, and are predicated on the concentration of wealth in the hands of a few.
Just a random example, if you can afford to buy a home in cash, you shouldn't because the mortgage terms the banks will offer you are too good to pass up - you'll come out ahead just by taking on low interest debt and accounting for the rise in the home's value plus the more lucrative investments you can make with the cash.
In other words, the people who get the most help are the ones who need it the least. That is the travesty of contemporary finance.
When the critique of the financial system is made its not in place of supply and demand for labor but the fact it creates very little besides disparity. The god of liquidity should not be worshipped so much.
> There are numerous financial products and services available to only the wealthy that reduce tax burden and increase wealth and income that are inaccessible to anyone else, create little value, and are predicated on the concentration of wealth in the hands of a few.
There is also additional pressure at the low end: Being poor is expensive, especially in a society with low solidarity.
Besides debt being a potential burden, there are many things that you don't have access to. You can't buy in bulk, you can't buy quality gear, a season ticket, a home, You simply cannot invest, even if that made sense in the long term for you, your community, society etc.
Credit cards are a ~2% tax on the economy. I think they're squeezing quite well still, but as has been historically shown, the number and depth of those sorts of opportunities declines with time.
I’d say they’re more of a regressive tax since people at the middle to higher-end cash make great use of credit card benefits and people at the low-end often get caught up in the trap of high interest rates.
The bigger factor is that per-worker productivity is amplified immensely by technology. Historically, businesses needed to scale their employee base nearly linearly with the number of customers. If you were in the business of building houses or growing produce, your economies of scale topped out early. If you want to serve more customers, you have to hire more people to do the work.
In the technology era, the marginal cost of additional customers is minuscule. Netflix has to pay marginally more for bandwidth and licensing fees with each additional customer, but the number of employees necessary to support a growing customer base is minuscule. Even physical goods can have automated production as they scale up, so physical workers are less and less necessary as scale grows.
For the jobs that remain, supply and demand still dominates the equation. Engineer salaries have been pushed upward because demand for engineering work exceeds supply. Factory worker salaries have been flat or gone down because demand for [domestic] manual labor is decreasing, meaning more people are willing to work for lower compensation just to take those jobs.
Try as they might, the financial people can’t simply break the laws of supply and demand. If they try to keep so much of the profits that their wages fall below other companies, employees will simply leave for higher paying jobs. If the company raises wages so much that they need to charge customers more, their customers will simply leave for lower cost competitors.
This behavior is more intuitive when you put yourself in the shoes of the decision makers. If you called a plumbing company to fix your drain and they quote you a price 2X that of the competitor but claim that it’s because they pay their plumbers more, are you going to gladly take it? Or would you just call any number of alternatives that will charge you market rate costs? (If you are among the few who would gladly pay more for the same service, ask yourself how the general population would behave)