Russ Roberts

Gabriel Zucman on Inequality, Growth, and Distributional National Accounts

EconTalk Episode with Gabriel Zucman
Hosted by Russ Roberts
This is a Job for Super Regula... The Rich Get Richer......

rich%20and%20poor.jpg Gabriel Zucman of the University of California, Berkeley talks with EconTalk host Russ Roberts about his research on inequality and the distribution of income in the United States over the last 35 years. Zucman finds that there has been no change in income for the bottom half of the income distribution over this time period with large gains going to the top 1%. The conversation explores the robustness of this result to various assumptions and possible explanations for the findings.

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Podcast Episode Highlights

Intro. [Recording date: September 7, 2017.]

Russ Roberts: Our topic for today is Gabriel Zucman's recent paper with Emmanuel Saez and Thomas Piketty, "Distributional National Accounts: Methods and Estimates for the United States", which has received a great deal of attention in the popular press and among economists.... So, it's a very provocative and complicated paper. We're going to try to do two things today among a few others, but we're going to try to give listeners an idea of what the paper finds, and then how such a finding is actually constructed using data. So, some of the background of how this kind of empirical work is done. So, let's start with some of the key findings of the paper. In a recent treatment for the average person, not for an economists, which you wrote up--we'll link to that write-up--you suggest there are three key findings. What are they?

Gabriel Zucman: So, what we are trying to do is research to impute income growth for each group of the population with a way that's consistent with macroeconomic growth. And so, there are indeed three big findings. So, the Number 1 finding is that you had some growth in the United States since 1980--that is, the average income per adult has increased about 60% since 1980--

Russ Roberts: Corrected for inflation.

Gabriel Zucman: Corrected for inflation--so it's in real terms. Exactly--

Russ Roberts: And including--I just want to make one--this is really important: This isn't just earnings. This is all forms of income: taxes, transfers, right?

Gabriel Zucman: This is all income as recorded in the National Accounts. So, that is the headline figure that we hear when we talk about GDP [Gross National Product] growth--about the macroeconomic growth rate of the country. So, if you compute macroeconomic growth per adult, what you get is this number of 61% increase in total income since 1980. But the Number 1 finding is that income growth has been very unequal. So, if you look at income growth for the bottom 50% of the distribution, before taxes and transfers--so, before any form of government intervention--you've had zero growth for the bottom 50%. So, for half of the population, they've been completely shut out of economic growth. Their income in real terms has not increased. The second finding we have is that, you know, by contrast, at the top of the distribution there has been a lot of growth. [?] at the top 1%, their income has been multiplied by 3 in real terms since 1980. To give a sense of how heterogeneous growth has been in the United States, so, we can express these numbers in terms of real growth rates per year. So, when I say that average income has increased 60% since 1980, that's equivalent to an annual real growth rate of 1.4%. So, that's the average in the United States. What we find is that, for the vast, vast majority of the population, the growth that they've experienced has been much less than 1.4% per year. In fact, for the bottom 88 percentiles, or for 88% of the population, income has grown less than 1.4% per year. So, only for the top 12% that income has grown at above 1.4%. And among that group, it's really only in the top 1% and top 0.1 and top 0.001% that you see high growth rates of 3, 4, 5% per year. And so, that's important, because some people have a view that what is happening in the United States is that, let's say, the top quintile--so, the top 20%--has pulled off from the rest of the economy. And that's not really what we find. We find that rising inequality in the United States is really very much a story about the top 1%. So, another finding we have is: How do these reserves[research?] change when you take into account taxes and transfers? So, the effect of government intervention. When [?] of government estimates of inequality in the United States is that they don't take properly into account of the role of taxes and transfers; and all the numbers that I've mentioned up until now were about pre-tax- and transfer-income. Now, after taxes and transfers, and when you take into account all forms of taxes--at the Federal level, at the state and local level--and all forms of transfers--whether monetary transfers or in-kind transfers or public goods spending--what we find is that government distribution has made growth slightly more equitable. But only slightly so. That is, if you get back to this bottom 50% of the distribution that has experienced zero growth pre-tax and transfer, after taxes and transfers its income has grown a little bit. It has increased by about 20% since 1980. That is still much, much less than the average growth of 60%, and of course much less than growth at the top of the distribution. So, our conclusion here is that, despite important changes in government transfers and the expansion of certain important programs like Medicare and Medicaid, that has not been enough to significantly lift the income of working class Americans--so the bottom 50%. And, the last finding that we have, which I think is [?] very interesting, is that what we are currently trying to do now is compute similar statistics in other countries. And we've done that in France. And we can compare, let's say, the income growth rates for the bottom 50% in France and in the United States. And the trajectory has been very different. In 1980, the bottom 50% income earners used to be about 10% richer in the United States than France. But, what has happened is that in France, since 1980, bottom 50% incomes have continued to grow at roughly the same rate as macroeconomic growth in France, when the United States has completely stagnated. As a result, now, the bottom 50% in France is significantly richer--has more income--than in the United States. And that is before taxes and transfers. And that, what makes this reason[research?] particularly spectacular--I'm not talking about the generous welfare--French welfare state. That's not what's driving our results. Before tax and transfers. So looking just at market income, the bottom half of the distribution, half of the population now does better in France than in the United States. And that's our last main finding.


Russ Roberts: So, listeners will not be surprised that I'm skeptical of these findings. Right? And--I have to say--I find them hard to believe. So, I'm going to give you a chance to convince me, over the next 50 or so minutes. But let's start with how you constructed these. So, to give listeners a little bit of background: How would you begin to use the National Income Accounts? Let me say it differently. You might--you might, listeners, you might understand--you might hear that capital's share has gone up--or down--compared to labor. Or, 'Men and women have had different wages and growth rates of wages' over a particular time period. But, Gabriel, what you are I think trying to do here is say, 'When GDP grew 3.2% in such-and-such a year, how much of that went to the bottom quintile--the 20% who were the poorest in the United States? How much went to the top 1%?' That's a very hard task. So, how would you begin? How do you begin to make the assumptions that you need to do to apportion those gains to different strata of the income distribution? And let me know if that's the right question.

Gabriel Zucman: Yeah. That's a great question. That's exactly what we're trying to do. What we're trying to do is to bridge the gap between the study of macroeconomic growth, where people use National Accounts data, and the study of inequality, where people use tax data and survey data to study the distribution of income or the distribution of wealth. The problem is that there is a large gap between the total income that you see in the survey and tax data, and total macroeconomic income--total GDP or National Income. And that's a problem, because then it makes it hard to decompose macroeconomic growth by income [?]--to have just growth statistics for each fractile of the income distribution, for each growth of the income distribution that add up to the headline GDP growth number. So, the way that we try to bridge this gap is by combining National Accounts tax data and survey data. So, they all have strengths and weaknesses. But if you combine them--and you can try to approximate the distribution of Total National Income, as we call it in the National Accounts. And, I want to stress that this, what we've done, in my view, is very much a prototype. So, there are uncertainties. Could be improved in many ways, as more data become available, as methods are improved. But I think the objective is worthwhile. That is, it's important to try to not only measure growth but be able to say, 'Here is how growth looks like for people like you.' So, our starting point is: National Income, as recorded in National Accounts. So, what is National Income? That's GDP, Gross Domestic Product, minus capital depreciation--which is not an income for anybody. Plus the net income that the United States receives from abroad--so typically dividends and interest that the United States receives from foreign countries, minus and interest like based in foreign countries. So, it's very close to GDP. And that's our starting point. And then, what we try to do is to allocate this big total to which group of the population. So, some from the income of, are well-captured in tax data. Typically, the dividends and interest income that wealthy individuals earn--tax data of a critical source of information to capture that, because all rich people have to submit a tax return. And, that's how we know how that form of income is distributed. Wage income, as well: Tax income does a very good job there. For other forms of income, you need to look at survey data. Typically, transfers, a lot of transfers, are not taxable and so don't have to be reported on tax returns; and so you need to look at survey data. You need to do [?] CPS[?] [Child Protective Services? More probably in this context: CPS=Current Population Survey--Econlib Ed.] in the United States, the current population Survey. And you have a third category of income that you see, neither see in tax data nor in survey data. Things like, corporate retained earnings, for instance, which have increased a lot since the Great Recession. Then you need to impute them. So, what we do is, in that research is pretty technical. We try to explain, for each income category, how we capture those income categories. Tax data[?], so there is all imputation. We try to be very explicit about the tax [?] imputations[?] that we are making, when there is no readily available source of information. And we try to investigate what happens when we impute income in different ways. And broadly speaking, the research don't change much for the simple reason that the rising inequality in the United States--the trends are so massive that even small deviations--you know, changing imputations from some capital reserve income doesn't affect these big trends, which was already very visible in survey data or [?] data. So, that's a broad methodology.


Russ Roberts: So, let's start with--I am fascinated by the claim that the bottom 50% has had no gains in economic benefit--certainly from market-based economic benefit. So, again, we might want to distinguish between inequality or gains from market-based results. Which could be your investments; It could be your salary, or wages, your fringe benefits. And then there's a second thing you would look at, which would be: Well, what about your taxes? And what about transfers? Government benefits? You might be eligible for and receive unemployment insurance, food stamps, Social Security, etc.? So, to me the most dramatic claim, and the one that I'm most skeptical of, is the idea that the bottom 50% had zero pre-tax and transfer. That is--ignore tax and transfer for a minute. Just look at the outcomes from what people earned and invested and gained, or lost. And that is stagnant. For a 34-year period during which, economic growth, as you say, was quite substantial: 60% per adult, over the--an increase of 60% per adult. It's saying that the bottom 50% got none of that. So that's a very dramatic claim. So, my first question is: What does--and just a clarifying question: Does the additional of the National Income approach or the National Income accounts data affect that very much? Because that bottom 50%--they are not getting a big part of corporate-retained earnings, I assume, or other things that might show up in the National Accounts that aren't in taxes or survey data? America I right in that?

Gabriel Zucman: Yeah. You are absolutely right. I mean, the bottom 50%, it's actually relatively easy to observe their income, because the vast, vast majority of their--all of their income, pre-tax and transfer, it's labor income. It's wages and salaries and second-employment[?] income. And that income is typically very well-recorded by the tax data[?]. And the survey data. So, this trend, that there has been zero growth in pre-tax income for about half of the distribution, you could see it already pretty well in tax and survey data. Where tax and survey data have limitations, important limitations, is not really for wage income or labor income, probably speaking. It's for capital income--

Russ Roberts: right--

Gabriel Zucman: Because, if you look at the flow of macroeconomic capital income--so the capital share that macroeconomists study and they find it's relatively big, about 25, 30% of National Income and they find it's [?] in the United States and in many other countries. About two-thirds of this macroeconomic flow of capital income, you don't see it in tax and survey data. In tax[?] they tell you, only see one third of total capital income because the majority of economic capital income is actually tax-exempt. That includes corporate retained earnings, imputed rents for home owners, a number of taxes like the corporate tax and property taxes. And a big flow of dividends and interest that's paid to pension funds. All this, big flow of capital income, it's part of economic capital income, but you don't see it in tax data. Now, capital income tends to be more concentrated than labor income. Which means that actually with tax data, ordinarily you can't do too good a job at studying the rich. That's kind of--you know, a paradox, because people started using taxes--they started studying the rich. But if you think more about it, there is a [?] two thirds of capital income that all go[?] it goes to the top. So, our imputations are going to play some role for the dynamic of income at the top and for the composition of income at the top. But, for the bottom 50%, they are not playing any significant role.


Russ Roberts: So, let's start with that. Let's just start with the bottom 50%. So, I want to start by saying something that I think sounds like it's impossible. But, I think it's a very important truth. And I just want to get your reaction to it. When you say that the bottom 50% have no gains in income between 1980 and 2014, that does not mean, that does not rule out the fact that, if you went and looked at people in 1980 and you followed them throughout time--in particular, if you took 25-year-olds in 1980 and followed them till they were 60, 59, if I got the years right, in 2014--you are not saying that none of those people had any growth. Because obviously millions of them did. Millions of them are better off in 2014 than they were in 1980. Right?

Gabriel Zucman: That's correct. So, the approach that we have in this research is, let's say, a cross-sectional approach, where this means very simply is that we look at the distribution of income, year after year. We are not trying to photo[?] people over time. Which would be very interesting and important and hard to do. But in this research is very much a first step. We don't follow people over time. Now, is it likely that if you are able to follow people over time you would find a significant amount of growth for the bottom 50%? I'm a bit skeptical. For the following reason. What we tried to do, what we are doing as research is we compute income distributions by age groups, so we can look at the bottom 50% of income earners, age 20-30. 30-40. 40-50. And, when you do that, you see, basically, no growth for the bottom 50% within each age group. And so that suggests that even if, of course, you know, over the life cycle, people's income and wages change, there has been this huge stagnation of wages for working class America at all age levels. Such that, it's unlikely that, even if you were able to follow people over time you would see a lot of income growth. And, you know, more generally, there is no indication that there is a lot of mobility in or out of the bottom 50%. There is no indication that people in the bottom 50% of [?], to move, say, to the top 10% or that they move to the top 1%. The Social Security data that are used to study these questions where you can follow people over time are very clear on that. There is a lot actually of persistence in income over time. So, if you are in the bottom 50% of the distribution at some point, you are still very likely to be in the bottom 50% next year or two years after. But, you know, we need more research on that question. And it's certainly a next step for research.


Russ Roberts: The reason it's important, more generally, is because: If, to take an example, the United States had a lot of low-skill immigrants come into the country between 1980 and 2014--which, there's a decent number of. Obviously it's a bunch. But there's also some high-skilled immigrants who came, which complicates it. But, if you had low-skilled-only immigrants who came, then what you would observe is--you might observe that the average wage level in the United States could go down, but every person who was already here before the immigration are better off. And so, the average growth rate for the bottom 50% in that situation could be very misleading about the state of the economy. Could be just a composition effect.

Gabriel Zucman: Right.

Russ Roberts: So, that's one issue. Now, when people do follow the same people over time, they do find very different levels of growth. And in fact, I mean, it's shocking. When I talk about these numbers, people always assume they can't be true, because we all know so many things about the income distribution. But I don't understand how these numbers can be so different. So, for example, Gerald Auten has done work with colleagues--was in the National Tax Journal--I'm just going to quote these numbers, because they are so striking. He looked at people aged 35-40 in 1987--so he's going to look at a 20-year period, 1987-2007. It doesn't exactly overlap with 1980-2014. But, it's a 20-year piece of your time period. He finds--they find--that, shockingly, the poorest people had the biggest gains in income. The lowest quintile over that 20-year period--that is, you started, you are 35 years old in 1987, 20 years later, the people in the bottom quintile had doubled their income. They had 100% growth. That's the change in median within that quintile. For the next quintile, it's 42%. For the next, it's 27%. So, the three lowest--the median income within the three, the bottom 60%, went up by 27, 42, and 100%. The 4th highest quintile only went up went up 11, and a 5th only went up 5%. So the largest gains went to the poorest people. And that's totally different than the standard finding that people claim about that the average person, the median person, the bottom 50% are making no progress. What do you think is different about their results relative to yours?

Gabriel Zucman: I think there are many differences. So, one thing is: What's the income that you are looking at? Are you looking at pre-tax income? Are you including some of many forms of government transfers? What we are trying to do in our research is to add a really clear distinction between what is income before any form of government intervention--what we call pre-tax income, and income after you include after you include all forms of government taxes and transfers. Another difference is: How do you deal with changes in household size? Changes in marriage rates and divorce rates? A lot of the analysis in inequality, you know, is conducted at the household level, which, you know, can be a problem if household size changes a lot. Which has happened in the United States. So, what we try to do in our research is to address that issue by looking at income per adult, where we split income, the income of married couples, 50-50 between each spouse. So, to have at least consistent unit of observation over time that's not affected by changes in household size. And most importantly, what we've tried to do is to have members that add up to total GDP growth and to total National Income. And so, if you believe that income has grown a lot at the bottom of the distribution, it has to be the case that it has grown a lot less at the top of the distribution than what we estimate. That's contradicted by a huge and overwhelmingly large set of evidence from [tanzlita?] in particular. So, again, I think more work needs to be done to better study changes in income when you follow people over time. But, reading that I do after most recent studies that follow the entire population of working age Americans using Social Security data, even when you do that, when you follow people over time, you see a huge increase in lifetime inequality. And the point about immigration--I mean, it might play a role. I'm not sure, though, that it explains a lot of what is going on. Because, look at Europe. Before the Great Recession, the Crisis of 2008 and 2009, there was actually more immigration in the EU [European Union] than in the United States. That has changed since the Great Recession. But if you look at the 2000-2009 period, that's, that's, that's true. And, 11 developed[?] countries, that includes France, Germany, Scandinavian countries, where immigration was much higher than in the United States. And yet, we don't see the type of stagnation involving 50% incomes that we observe in the United States. Getting back to the case of France, we see that the bottom 50% has been growing at roughly the same percent as the same economy. Looking at Scandinavian countries, is even more spectacular. There is much more inequality--there is much more equality there, in Scandinavian countries as in the United States. And growth has been much more equitably distributed than in the United States. Despite higher immigration as than in the United States. So, I think what's more important to--as an explanatory factor for understanding what is happening in the United States is not low-skill immigration, but it's a number of changes to policy. The decline in the real Federal minimum wage since the late 1960s or 1970s. The decline in the role of unions. More broadly speaking, the decline in the bargaining power of labor. Very unequal access to higher education. All of these things, I think, have contributed to the stagnation of the bottom 50% income in the United States.


Russ Roberts: Okay, we're going to come back to those because those are really interesting and provocative. I disagree with three of them; but I agree with one of them. So, that's pretty good. I just want to make a clarifying point on immigration and then I want to ask you about the family structure issue. So, I agree with you on immigration: I don't think that it's important. I just gave that as an example of how misleading it could be when you look at different snapshots over time because they are not the same people. I think it's very interesting that all--not true any more--but, for a while all of the studies that followed the same people over time showed large gains for the poorest people. That's true in the Panel Study of Income Dynamics [PSID] that people have analyzed, which follows people over time since 1970s.

Gabriel Zucman: That may be true in some studies that use survey data, and PSID, but that's not true in the studies that use the population-wide Social Security data.

Russ Roberts: The recent ones that came out. But the Auten study that I mentioned--we'll put a link up to it--the Auten study that I mentioned is actually using tax returns and it's quite exhaustive; it's an enormous sample of the entire universe of tax returns that showed the largest gains for the bottom. And not just the largest gains--quite large, dramatically larger gains. But the question I want to focus--I want to [?] for a minute before we get to the causation and speculation about what are the explanations for this: Let's talk about households. And you make a very good point, which, because it drives me crazy: There's been a huge change in household structure in the United States over the last 35, 40 years. It goes back to the 1970s when the divorce rate in the United States started to rise very, very rapidly. And it rose very disproportionately by education. So, there was a big increase in divorce for the people with the least education. People with the highest education tended not to divorce. And I think--it's either in your results or in others I've read--among the top 1%, the percent that's married is very high, remains very high. Whereas in the rest of the population it's fallen dramatically--but particularly dramatically among low-skilled, low-education workers. So, what we've seen in the United States since the 1970s is an increase in households that's not due to population growth, but it's due to either divorce or people not marrying at all. And, that that increase in households has not been spread equally across the income distribution--it's disproportionately found in the lower half. Does that--when you apportion family income, household income, equally between husband and wife, do you think you--are you controlling for that?

Gabriel Zucman: We have a way, which is not the only way--and we consider other ways to control for that--which is to always conduct the analysis at the adult individual level. Then the question becomes: How do you split income within married couples? And, there's a lot of research on that, and sharing rules among couples, and very interesting research in this area. But it's hard to have long time series for empirical sharing rules. So, in our benchmark series, what we do is, we are agnostic and we just say: Income is split equally. Now, with the data that we have and that we are going to make online, the micro-files[?] that we are going to make online relatively soon, you can experiment with other sharing rules and you can say, 'Okay, husbands [?] take a greater fraction of the comparison[?] of income, or a smaller fraction; this has changed over time.' But, that's the way that we address this issue. We think that if you want to be consistent, if you want to create series that are consistent with macroeconomic growth, which is typically expressed in terms of per adult income, you need to study the distribution of per-adult income. And so I think that's progress compared to the studies that look at household incomes and sometimes use no equivalence scales to individualize[?] income, because we searched studies: You can't be consistent with macroeconomic growth. Your country[?] decompose macroeconomic growth across social groups.

Russ Roberts: I want to add that, when I raised the data findings of the paper by Auten, et al, in the National Tax Journal, you correctly asked the question, made the observation it depends on what kind of income you are looking at. They were, I think, looking at after-tax, after-transfer; so they find large effects. They may not have found those same effects if they had narrowed it down to labor income. But, it does also challenge your conclusion that taxes and transfers don't have a big effect. And Auten has that other paper with Splinter from 2016 where they find large effects in reductions of--they find much smaller growth in inequality when you include government taxes and transfers. What do you think explains that difference relative to yours? Have you looked at it?

Gabriel Zucman: Yes, yes; we've looked at these carefully. And there are a number of differences. One big difference is--we tried, and we do distribute 100% of National Income, and they don't. Another difference is, when you [?] pre-tax and transfer income, whereas they look at income concepts which are more mixed. So it's really in the area of data[?] that you mentioned, it would be income including some forms of government transfer, but not excluding taxes, for instance. Now, we know, taxes for the bottom 50%, people don't know that but they've increased quite a lot--

Russ Roberts: Social Security--payroll taxes--

Gabriel Zucman: because of payroll taxes. Exactly. They've increased a lot. The overall tax system in the United States, if you compute average tax rates by income group, taking into account all taxes at all levels of government, you find that the top 1% average tax rate is a bit higher than the average macroeconomic tax rate in the United States, which is 30%. You find that the bottom 50% average tax rate is a bit below 30%. But the difference is very small. That is, you know, all together, the tax system in the United States is barely progressive. It's close to a flat tax where everybody almost pays 30% of their income. And that's a big change compared to the 1960s and 1970s where the top 1% average tax rate was significantly higher and bigger than the average tax rate; and the tax rate for the bottom 50% was significantly lower, below the average tax rate. And so, you know, it's very important to be consistent. You can't just look at transfers but forget about taxes, and vice versa.

Russ Roberts: Yep; I agree.

Gabriel Zucman: So, that explains a lot of the differences.


Russ Roberts: Let's talk about the possible explanations. The last thing I want to add is that consumption data also, to me, casts some doubt on the claim that the bottom 50% have made no change in their economic wellbeing since 1980 or a very small change. The bottom 20% has much greater access, and of course, a fortiori, the bottom 50% has a much greater access to a huge range of consumer goods. Cellphones, washing machines, air conditioning, cars; houses have gotten larger, the median house is larger, it's not just houses at the highest end. So, to me, that's also a challenge to the finding that there's been no gain. I was alive in 1980--I think I'm older than you are, than you were then--were you born in 1980? But I was an adult; so I remember what 1980 looked like. And the world has changed a lot. It's a lot richer; there's a lot more stuff. And it's not just going to the top 1% or the top 10%. It's all over the place. It's in every Walmart--I'm not saying it's particularly important or good. But it's hard to understand the claim that there's no gain for that group. This is not a very sophisticated argument. It's a sniff test.

Gabriel Zucman: Well, I hear this argument, yeah. The thing is that, when you look at the macroeconomic data--so, let's forget about distributions for a second--is it the case that there's been a lot of growth in the United States since 1980? In the macro data, the answer frankly is, 'Not really.' Average income per adult, in real terms, has increased only 1.4% per year since 1980. That's what the macro data tell you. Now, maybe macroeconomic statistics understate the actual growth rate of the economy maybe because--

Russ Roberts: the price index--

Gabriel Zucman: of a problem with the price index, the price indices--yes--and they overstate inflation and they don't properly take into account new products. So, the price index that we use, and it is also a difference with some of the studies that you mentioned, is, I think, what's probably the best price index, the one that takes into account the substitution bias and other problems with the CPI [Consumer Price Index]. It's not the CPI. It's the National Income Price Deflator--it's the deflator that's used, the price index that's used to compute real macroeconomic growth. And it shows less inflation than the CPI. So, we already take into account one standard important criticism that's been addressed to this literature[?], which is, 'Oh, no; you understate real income growth because you have overstated inflation.' Now, maybe even the GDP Deflator or the National Income Deflator might overstate inflation. That's possible. What we do is that we take the National Accounts data as given; that's really one[?] limitation of what we do. We know that they have problems. But we think it's valuable to say: Let's introduce distributional measures in this macro data, and then if the macro data change then our results also will be changed.

Russ Roberts: Yeah, no, I think that's exactly where I do think you are using a better--it's such a complicated question, right? Because ideally what you want is a basket of goods that the bottom 50% buys. Which is, of course--the macro, the GDP Deflator has business purchases and there's a big interesting technical question about how computers have changed the price over time and how that's affected productivity; and whether we are measuring it correctly for individuals versus the economy as a whole, and not something to get into right now. But the--I mean, it's obviously a really hard problem; and you did the best you could. Obviously. I think you did. There's nothing particularly easy or definitive about that decision. You have to make a decision; and that's probably the best one, and it's consistent with the GDP accounts, so it's a good choice.

Gabriel Zucman: And, I didn't answer your question on consumption growth, which I think is very important. So, first of all, consumption--the data we have to study consumption are frankly of limited quality, unfortunately. They miss a lot of consumption. They [?] capture well the consumption of the wealthy and so on. But the second thing that's important is that consumption and income can evolve differently, if saving rates change.

Russ Roberts: True.

Gabriel Zucman: And certainly that's part of what has happened in the United States, which is that household debt has skyrocketed before the Financial Crisis; the saving rates of the middle class and the working class has collapsed. What we find is that in the 10 years before the Great Recession, the saving rate of the bottom 90% of the wealth distribution--when you rank people by wealth--was actually negative. Okay? So, they were consuming more than their income. And that's a big part of, you know, the macroeconomic story. And also can help reconcile the trends in consumption--maybe there's been some increase in area[?] of consumption with the trends in income.

Russ Roberts: Yeah, it's an interesting point. Obviously, in the run-up to 2007, 2008, a lot of people saw their home--the values of their homes or what they thought was the value of their home--rising. And many people borrowed from that future, what they thought was a future capital gain, in order to increase their consumption now. And then it turns out that capital gain never materialized. And, it's definitely the case that there was some consumption that was financed out of thin air that wasn't real. Financed out of creditors who never got their money back. For sure. Who consumed less, presumably, than they expected.


Russ Roberts: Let's turn to the causes. So, the first--you mention four, which are all interesting: the decline in unionization in the United States; the stagnation or actual fall in the real value of the minimum wage; the loss of bargaining power of labor; and access to education. So, I don't understand those arguments in general. I do understand the last one. Let me raise the issues I don't understand about the first three. So, let's start with unionization. Unionization in the United States in the private sector, pretty much fallen steadily since 1945. In the aftermath of WWII, manufacturing as a percentage of total employment fell steadily; unionization fell steadily both in percentage and absolute terms. And so, it's hard to understand why, when we look at--let me say it differently. When we look at all the data on these issues of stagnation of the middle class--again, I'm moving away from inequality right now; just this question of how the average person is doing and whether they benefit from growth--it's hard to understand why 1973, say, or in your case with your data, 1980, it looks so bleak. Because that unionization was falling all along. And those gains in the measured data are very different in the post-War, 1945-1973 or 1974 period than they are in the later period. Suggesting maybe it's not unionization. What are your thoughts on that?

Gabriel Zucman: I think it's possible that the decline in unionization affects income distribution. We saw some lag because it takes time to change, you know, wage contracts. There is some stickiness in labor agreements. What I find pretty striking is when I look at the cross-section of countries today, and also, you know, the panel[?] of countries, at the global level, there is a pretty strong correlation between unionization and income inequality. So, you look at the countries that, where the middle class is doing well these days. Germany, Scandinavian countries: These are economies where unions have power. You know, unions are in corporate[?]. A big function of the workforce is unionized, much more than in the United States. So, these are economies that, just like the United States, have been subject to the same trends of globalization, open international trade; they do import a lot of stuff[?] from China; they do export a lot; they are very integrated in global markets. They have faced the same trends in terms of technological trend, technological change. And yet, the income distribution, and the growth rate of income for the middle class and the working class, has been very different. And it's hard to say what fraction of this owes to unions and what fraction of this owes to minimum wages, education, and other factors. But all together, I think the reasons we have suggest that, broadly speaking, policies matter a lot. And policies affect the pre-tax and transfer distribution of income. And, they matter a lot. Because, if they didn't matter, we should see the same orders or same trends in all the world's developed countries as in the United States. And that's not at all what we see.

Russ Roberts: Well, I guess the question is: What other trends are going on beside policy changes? The demographic changes we talked about, to the extent that they are hard to control for, could be very different in the United States than elsewhere. I think worldwide, in general, there are similar trends. You are right--they could be different in some countries relative to others--the magnitudes may not be the same. But the growth of command of the top 1%, the income share as measured to going to the top 1%, has grown very dramatically in a lot of industrialized countries. And, I just think about--well, anyway--I'm not--I'm open to the possibility it's unionization. I don't think it's as you say. It could be just one factor. But there are other factors that are not the same across countries. Globalization is one that is similar across a lot of countries. But do you have any idea of what unionization is in Germany? In the United States, I think it's now under 10% in the private sector.

Gabriel Zucman: I don't want to say, you know, [?] know off the top of my head, but I do know that unions in Germany, they play a much bigger role in corporations than in the United States. So, typically, unions have several board members. They are in the corporate world. So, they are involved in decision-making at the--within corporations. And, yeah, that's a big difference with the United States. And it's likely to be part of the reason why the German working class is doing working than the United States. You know, just the buying power that it has is why it's stronger. In the United States, corporations increasingly since the 1980s have been viewed as having for sole purposes the sole purposes of maximizing shareholder value. So, that's something that's, that's [?] very strongly in the United States--what a CEO [Chief Executive Officer] should do is maximize shareholder value. Now, ask this question to people in Germany, to people in Scandinavia, 'Is the role of a CEO to maximize shareholder value?' And they have very different answers. You know, most of them would say, 'No. There are several stakeholders. There are shareholders. There are workers. Customers. Local governments. And we have a duty towards all of these stakeholders, not only shareholders.' And so, of course, if this, such a different state of mind, I think that explains, you know, part of the difference between the United States and other countries. And I think if you look carefully at the data, I'd like to push back a little bit on this idea that the top 1% has surged everywhere. I think the rise in the top 1% income share among rich countries is actually a uniquely American phenomenon. It is not something that you see in Continental Europe. It is not something that you see in Canada. It is something that you see a little bit in the United Kingdom, but the magnitude in the United Kingdom of the rise is much less than the United States. The United States is the main people[?] the outlier among rich countries. The top 1% used to have 10% of total pre-tax income in 1980. Now, around 20% of the total pre-tax income. Whereas, for the bottom 50%, it's exactly the opposite. The bottom 50% used to have 20% of total pre-tax income in 1980. Now, it's[?] around about 12% of total pre-tax income. There is no other developed country in the world where such a phenomenon has happened since 1980.


Russ Roberts: Well, you know, there's two possible--we were talking mainly about the bottom 50% before, but now we're on the top. The United States has--again, remembering that we're not following the same people. We're looking at a point in time. I always use the example of an athlete. In 1980, Larry Byrd and Magic Johnson were the best basketball players, and they made a lot more than the average person in the stands who was following them. In 2014, the best basketball players, I would say--you could argue who they are, but let's say--LeBron James and Stephen Curry. They make much more than--the ratio of their income to a fan in the stands is much higher. Because basketball is a lot more popular around the world; globalization has occurred; the gains to being the best have increased. And one could argue that, 'Yes, in the United States it's much easier to make a lot more money today than it was to make a lot more money in 1980.' And that's not a bad thing. There are examples of it that are bad things--people on Wall Street, I think, have benefited in a grotesque way from the willingness of the U.S. government to treat them with special favors; and I think that's a distortion that we should be upset about. Whether we should be upset about LeBron James--we might want to tax him more. You're right. We might agree that that's a good thing. We might not. But if we just looking at the underlying effectiveness of the economy and the role of market forces versus, say, government policy to set salaries, I don't find anything surprising or disturbing about the fact that the United States is in many ways a more entrepreneurial economy than outside the United States--the opportunity of access to venture capital is unparalleled. So, there are a lot of reasons why Sergey Brin and Larry Page and Mark Zuckerberg and LeBron James and all these folks--entertainers would also be included--do a lot better today than they did a long time ago. And I don't find that disturbing. I find parts of it disturbing. What are your thoughts?

Gabriel Zucman: Well, I think--and I know--basketball, particularly, is not a good example, because I'm sorry to say but people in Europe and outside of the United States, most of them don't really care about American basketball. And so it has always been and still is something that is of interest only to the United States.

Russ Roberts: I think they care in China, actually. Which is kind of a big country.

Gabriel Zucman: Maybe. But, to me, what drives, what has been driving top incomes and in particular for top corporate executives is there is much less globalization than the big changes that have happened in terms of tax policy in the United States. So, think about it. Globalization happens everywhere. But, it's only in the United States that you've seen CEO pay skyrocket. What has happened in the United States--the United States was the country in the 1960s with the highest marginal income tax rate in the world--90%. It's hard to have more than 90%.

Russ Roberts: You can have it.

Gabriel Zucman: You can.

Russ Roberts: There's not much room. It's not a good strategy.

Gabriel Zucman: You can have 100%. But it was 90%. It's moved from 90% to something in the mid-20% in 1986, just until the Tax Reform Act of 1986. It's a dramatic development. Where, recently[?] in the 1960s, you face a 90% of marginal income tax rate. There is absolutely no incentive to try to earn $50 million dollars in income, when out of any extra dollar that you earn, 90 cents are going to go to the IRS [Internal Revenue Service]. There's just no such incentive to do so. Of course, when you face a top marginal income tax rate of 20% or 30%, now it becomes valuable to try to earn very high incomes. And then the question becomes: 'Okay. Is it now, top earners have incentives to earn more? Is it good? Is it, you know, translating into a lot of growth for the United States as a whole? Or is it mostly at the expense of other stakeholders?' And here, there is no perfect evidence. But, at a high level what I find compelling is that you don't see that macroeconomic growth has been spectacularly high in the United States since the 1980s. Again, actually, it has been pretty low. You don't see that. But you see the income of top earners has boomed. So, one reading of this evidence is that, thanks to these lower tax rates, high earners have been earning more. But it's not because they have been producing so much more. It's because what they've earned is other crops[?] of the population which have not earned, actually, that income. So, it's at the expense of other stakeholders. And typically, corporate executives are better able now to extract very high salaries from corporate bonds in the United States. That's at the expense of shareholders. That's at the expense of, maybe, other workers in the firms. That, I think, explains not--certainly not everything--but part of the increase in the very highest incomes in the United States.

Russ Roberts: Well, it's interesting you mentioned that Europeans don't care much about basketball. I thought you were going to say that basketball players don't make a very large portion of the 1%. Even athletes don't, and even entertainers don't. And some might even say it's not so much Wall Street, even. There's a big debate, and you're going to help me understand it better because I think you know the data much better than I do as to what the real source of those income gains are. When you mention CEOs--a lot of people have argued--I don't know if it's true, but a lot of people have argued that American CEOs make more because they tend to have more responsibility. Their companies are dramatically larger than companies outside the United States. The part of this--so, I'm interested. So, CEOs are part of the 1%, for sure. So, I'm interested in what your thoughts are on sort of the decomposition of where that income comes from in the top 1%. Because I know you've looked at it.

Gabriel Zucman: In terms of who are the top earners, a lot of them are indeed corporate executives in various industries. So, finance is an important component; it is far from all of it. In lots of industries--in finance, in the health care industry, manufacturing. So, across the board--in the pharmaceutical industry--you've seen the pay of the top executives grow automatically faster than average worker pay. That's part of what's happening. But, the data we have now, getting back to our distributional national accounts, shows that most of the--now, the majority of the income of top 1% earners is not labor income. Is not wages and salaries and stock options and bond indices[?]. It's actually capital income. And that's a relatively new development. In the 1980s, 1990s, the rise of U.S. income inequality was essentially driven by an increase in labor income inequality--the upsurge of top corporate executive pay. Since 2000, it's been very different: labor income inequality actually has not increased, might even have declined internally[?]. All of the rise of the top 1% income share since 2000 owes to an increase in capital income, in the dividend income, corporate profits, interest that high-income earners get. And as important, because, of course, the forces that shape the distribution of labor income and the distribution of wealth and capital income are quite different. And so if you want to understand rising inequality in recent years in the United States, you need to ask yourself, 'Okay. Is coming from capital. So, what's the reason for that?' So, one potential explanation is that these high-labor incomes of the 1980s, 1990s, have been saved at a pretty high rate, and so these high earners have been accumulating quite a lot of wealth. That wealth itself, it generates some return; and so capital income, which in turn is flow of capital income, is being saved at high rates. So, wealth further accumulates and capital income concentrations further increases. And, I think that this is what is happening in the United States at the moment. Not everything corresponds to that. But that was not very important in the 1980s and 1990s. Now it's becoming very important. Capital income at the top is more important than labor income.

Russ Roberts: Yeah, no; that's very interesting.


Russ Roberts: The point I wanted to make--I lost my train of thought a minute ago, but the point I wanted to add is that: I just don't agree that saying that you want to maximize shareholder value means therefore that you don't care about stakeholders. Outside the profit and loss. Obviously, if you treat your workers badly, you are not going to have very good returns for your shareholders. I guess the question, though, is whether there is some room to, or cultural constraints, on either CEO pay or what you have to pay workers that would be more likely in those places you are talking about. I think that's the question.

Gabriel Zucman: Yes. And I think when you have worker preemptives[?] in corporate boards[?], that sets limits to CEO pay--and that--there's no research limits in the United States. In the United States it is possible to get salaries of dozens or hundreds of millions of dollars. In a way that's for--you know, that seems impossible in Spain[?] or in countries or in most German corporations. And there are cultural reasons. There are reasons that the Internet[?], the role of unions, incorporate both. And there are tax reasons as well. And in the United States, again, if you manage, let's say, to earn income that's taxable as capital gains, whereas the top marginal income tax rate on that at the Federal level, 23.8%, that's, that's, that's not a lot. And so, when it's 23.8--yes, it's really worth it to try to earn a hundred million. In most other countries it's significantly more than that.


Russ Roberts: You are presuming--I want to--we can end with is, because I want to come back to your point you made earlier--we won't quite end on it if you have another few minutes. But the point you made about bargaining power. Usually market forces tend to result in higher salaries when taxes go up, and lower salaries when taxes go down. So, you are talking the desire people have to make more money. What your desire is, is that a market doesn't matter: you are stuck with, usually the market rate. So, when your tax rate goes--say, your tax rate goes up. If you can still get the job, usually that's going to increase the market wage you are going to earn. But, if you don't believe wages are set by market forces--which maybe they aren't; but for CEOs, they might not be. There might be some ability of Boards to act capriciously if sufficiently large. But, going back to the average person: I've never understood this claim that bargaining power matters. There's--I'm not in a bazaar. I'm not in a street market or a farmer's market where I can haggle over prices. There's a going rate for, usually, a certain type of skill. So, my bargaining power--maybe it means something differently than what I hear when you use that phrase.

Gabriel Zucman: Well, I think it--this is a question that is connected to the growing evidence about the rise of market power in the United States, and the fact that it seems we are increasingly so, and not on a perfectly competitive market. And, neither on the labor market nor on the product market. There is growing evidence of rising market, of rising concentration, maybe of rising monopsony power in the labor markets. And as soon as you on[?] it in the Econ 101, perfectly competitive, perfect-information markets, you know, pay can be different than the Marginal Product of Labor. It can be higher; it can be lower--in ways that are determined a lot by intra-firm bargaining, and so by directive[?] power of unions. And by policy. And, that, I think is--you know, explains, again, part of the divergence between wage inequality in the United States and wage inequality in Europe--in countries where salaries tend to be fixed by rigid salary scales. And much less by pure market forces. Which don't necessarily give you a wage equal to a Marginal Product, depending on the type of competition that you have.

Russ Roberts: Yeah; well it's interesting, though, at the--you are in the Bay area in California, where I spend my summers. And I run into and chat with a lot of engineers at Google and Facebook. And, Google is not using their monopoly power to the extent they have it to pay low salaries and treat their workers badly. They are very pleasant places to work. Maybe be even more pleasant if they had less market power. I don't know. I think--I actually think they are making some monopoly power and they are using it--they have some and they are using it partly to reduce their turnover rate. And the, their workers, the ones I talk to, feel that they are relatively well-treated. And they do make a relatively large amount of money. I think get free lunch, too.


Russ Roberts: Let's close with something we can agree on, with a little more eagerness, perhaps, which is the education system as the last factor that you mention. I think we probably agree that the people at the bottom half, and certainly the bottom 20%, have bad access, inadequate access to skills, and certainly to even formal education. What do think we can do to do a better job there?

Gabriel Zucman: That's a complicated question. But it's one of things that I find most striking and shocking about the U.S. economy--is, how well your probability to attend college is predicted by the rank of your parents in the income distribution. That is, it's almost a perfect 1-to-1 correlation. If your parents are in the top 1%, you have 100% chance to attend college. If your parents are in the bottom 1%, it's not like you have zero probability you have to attend college, but it's close to zero. It's not 10%. So, think about it. This is incredibly unfair. And a huge problem for the United States. Now, what are the ways to address that issue? It's a complicated question. So, I personally think that tuition fees, you know, tend to prevent access to 4-year colleges for young Americans from a working class background. And so that having more free public higher education could help having more equal access to higher education. Now, if that's one thing that might help, it's far from the only thing that's important--

Russ Roberts: The important thing is to graduate. And graduation rates are even--

Gabriel Zucman: [?] Absolutely. [?] I also think that lots of problems of, at the high school level, the elementary school level. And so, these are [?] very important questions. Maybe we can talk about these in another show.

COMMENTS (53 to date)
Matthew Whited writes:

So much bad science in this guys work. Bad assumptions on earning in a multiple adult household, no accounting for cost of living, no accounting for policy changes such as minimum wages, no accounting for general unemployment.

Oh well, i shouldn't be too surprised that a French guy thinks France is better off than the US (France, a country that is effectively bankrupt.)

Victor writes:

Life in the USA is definitely getting harder for lower 50 percent of the population. Things that we can live without are getting cheaper, but necessities like housing, healthcare, education are getting more expensive every day. Also we are moving towards "uberization" of the economy. Stable employment with benefits is harder and harder to find. I emigrated to the USA in the 90th from Germany. I would say that all my relatives who stayed in Germany have less stress and better quality of life than I have and they work less then I do. They have less thing to worry about. Their pensions and healthcare are covered by the government. They don't have to follow every tick of the stock market as Americans do, because their 401Ks and their children's education does not depend on the whims of the stock market and financial speculators. I would say that if you are already rich or have very sought-after skill it would be better for you in the USA, but for the vast majority of ordinary people Europe offers a much better life. Overall I regret immigrating to the USA. It is not a county of opportunities if you come from a first world county. It might be still a country of opportunity if you come from a 3d world county.

Bob writes:

This episode is a fantastic example of why people say economics isn't science -- how can intelligent people disagree so profoundly within their shared field of study? I've been convinced that there really is a science of sound economics that can be justified from first principles (catallactics), though it's unrelated to the kind of "math applied to money" econometric data mining / modeling that seems to dominate discussions labeled as "economics."

If there is such a thing as sound economic science, the core of that science elucidates the fundamental relationships between action and scarcity that enables us to explain the helpful or harmful directional effects of certain actions taken which do or don't contravene laws of economic science. Empirical investigations enable at most probabilistic guesses about magnitudes of change. That's econometrics, not economic science. Empirical investigations of how money changes hands and forms statistical aggregates with various relationships can never provide certainty in conclusions -- everything is a parameterized cloud of probabilities following from assumptions and human choices, which does not appear deterministic and so is unpredictable. It's sometimes interesting and useful to study magnitudes -- actuaries do this well. But we don't need econometrics to know with apodictic certainty that a wage price floor above the market clearing rate has disemployment effects -- this is a claim of economic science. Indeed econometrics could never provide certainty of this or any claim. It's not clear to me that econometrics is really science, even though it does use various scientific tools -- often very cleverly.

Speaking about abstract aggregates instead of real individuals it's possible to prove black is white, up is down, and anything goes. Talking about aggregates is often misleading because it treats countless individual actions and countless individual value judgements as if the aggregate itself had a simple explanation ("it's greedy capitalist pigs!").

Even if Gabriel Zucman's various claims were true (color me skeptical), it wouldn't eliminate or diminish in any way the importance of discussing the moral issues at play. Forcing people to do or not do certain things is a moral issue. Setting a price floor on wages that can be voluntarily negotiated makes it illegal to sell your labor for less than a certain arbitrary figure set by some uninvolved third party. That's a moral issue. Using coercion is always a moral issue. Not everyone is a collectivist / utilitarian / consequentialist that only cares about the monetary concerns of aggregates set by central planners. Forcing people to do things or not do things is a question of individual rights, of ethics.

Politics is essentially "applied ethics" and so ethical considerations are of the utmost importance independent of how many people vote for a thing or how it impacts inequality or GDP. Ethics matters. Sound economic science matters. Aggregates and models can prove or disprove anything with careful (or not-so-careful) use of assumptions and data mining. Aggregations and abstractions hide atrocities. Individuals are the ones who are harmed, not abstractions. Our moral discussions should always be focused on individuals, not abstractions.

Ethics is more important than economic science for determining what actions we pursue. Economic science is more important than econometrics for determining what actions we pursue.

But that's just my opinion, I could be wrong.

Bob writes:

Russ: what you're failing to appreciate is that with my Perfectly Reasonable Assumptions(tm) it's crystal clear that the best data says we need to implement socialism to fix inequality. Or if not socialism, then at least some good old fascism where the state and corporations come together and decide a fair distribution of wealth to labor. Or if not fascism, then at very least cartelization of labor. Cartels are wonderful, didn't they teach you that in school? Geez Russ, you're always sticking up for the greedy capitalist pigs in the 1% who are more or less kidnapping poor people and harvesting their organs to sell for big money. That's how they got where they are: grinding poor people under the heel of their jackboots because they're greedy and powerful and evil. Poor people are helpless and what we need is more central planning to fix it. Centrally planned coercion over an ever-greater scope of our lives is making the world better. Haven't you noticed?

SaveyourSelf writes:

Wonderful episode. Fantastic guest. There’s so much material worth talking about. Where to start…

~19:54 Russ Roberts said, “When you say that the bottom 50% have no gains in income between 1980 and 2014, that does not mean, that does not rule out the fact that, if you went and looked at people in 1980 and you followed them throughout time--in particular, if you took 25-year-olds in 1980 and followed them till they were 60, 59, if I got the years right, in 2014--you are not saying that none of those people had any growth. Because obviously millions of them did. Millions of them are better off in 2014 than they were in 1980. Right?"
Gabriel Zucman: That's correct."
Assumption #1: We’re all born naked. No assets. No skills. Assumption #2: Given that growth from innovation is real, the top end of the obtainable distribution of income will continuously expand. Assumption #3: Percentages are ratios. In order to compare ratios easily over time, the denominators of those ratios must be held constant.

Conclusion #1: the “income distribution” will naturally and predictably widen, over time, because the low end limitation is fixed at zero but the high earning end is ever expanding. Conclusion #2 The fixed lower end of the distribution will appear stagnant, especially when compared to the flexible upper end. Conclusion #3: If someone looks at percentages taken at different points in time, it is highly likely that the denominators do not match, in which case easy comparison of the two ratios is not possible. Thus, even though two ratios are both expressed as simplified percentages, they are different. Comparing two different things as if they were the same is a logic error.

Hypothesis: Even though we’re all born naked, some people inherit more useful tools during childhood—like habits, experiences, training, genes, equipment, property, currency, etc. Such inheritance could allow faster progression through earning brackets than a comparison group which lacks those advantages, or it could appear as if the devisee is starting off at a higher earning bracket right from the first job, or both. If that was the case—that inheritance helps—then you’d expect children of high earners to have a much higher likelihood of becoming high earners than children of low earners because they would have more potential to inherit. Further, if earning potential is a function of time, children born to older parents would have, on average, wealthier parents; would stand to inherit more; would have fewer siblings to compete with for inheritable resources; and would have a much higher likelihood of becoming wealthy in their lifetime than children born to very young parents.

ricky murphy writes:

Good episode. I took away a couple big points:

The US is not out-performing the world as much as we would like to tell ourselves. Especially when you look at the majority of the population.
In the last 50 years we have reduced investment in education and healthcare in comparison to our developed market peers.

Thomas Picketty is also talking about similar things. So great that Russ brings in the full range of highly qualified guests.

Kevin O'Donnell writes:

Regarding the life-cycle point Russ made, I am not sure Zucman justified his scepticism. He responded to argue that within each age cohort the share going to the lowest 50 percent has stagnated, as it had over the entire group. But that doesn't address the proposal that individuals in the lower 50 percent have improved their life through time. What matters is the proportion of each age cohort that is in the global bottom 50 percent. And I would be shocked if that proportion isn't decreasing with age.

zeropoundpom writes:

This episode was an infuriating listen. Russ kept using data that measures something completely different to try to argue against Zucman.
Zucman: The income going to the bottom 50% of the population has stagnated, while the income going to the top 1% has skyrocketed.
RR: But individuals are better off 30 years later.


An individual at the 20th centile is better off at 55 than he is at 25 BECAUSE HE IS OLDER AND HAD PROMOTIONS. Zucman is pointing out that a 25 year old at the 20th centile in 2010 is no richer than a 25 year old at the 20th centile in 1980, while a 25 year old at the 99th centile in 2010 is MUCH richer than a 25 year old at the 99th centile in 1980.

Can we all go home now?

Earl Rodd writes:

I listened only to the podcast. I did not read the paper. However, I thought of two elements perhaps missing:

1. Many people, even in the bottom 50%, work for companies for which health insurance is a benefit. While some benefits, like vacation, are proportional in value to wages, the value of health insurance has increased dramatically. This could be disguising some of the increase in income of the bottom 50%. For many administrative jobs, the cost of health insurance can be as high as 50% of wages.

2. There was good discussion about including taxes and government benefits. But one very direct benefit seldom included is free education. And yet, the cost of this benefit has increased far faster than inflation. This helps disguise the actual increase in effective income of the bottom 50% etc.Even if the value of the education hasn't been commensurate with the cost, it still costs a lot and is thus no different than a person spending their own money unwisely.

Debashish Ghosh writes:

I think Kevin O'Donnell makes a valid point in his comment above. Russ and others have often pointed out that a disproportionate share of individuals making below minimum wage are younger people - and that may also be true for those making up the bottom 50% income earners. So it does seem like its important to look at the proportion of each age cohort that is in the bottom 50 percent. If the data on that is published somewhere, that'd be interesting.
I'll also observe here that on such matters of statistics, it seems hard to elicit the desired level of clarity from a guest in an audio podcast, where one does not have the option to bring up charts or graphs. I wonder if Russ feels the same way..

Ajit Kirpekar writes:

I'm a bit surprised the guest kept comparing the US unfavorably to France(and the rest of Europe). Even if his premise about inequality were true, I'm not sure Europe is the idealic comparison. Youth unemployment is horrible. Most of the continent is in terrible fiscal shape and going through a period of sclerotic growth. Is this what we would want instead?

Russ Roberts writes:


Unfortunately, I think you have described both my argument and that of Zucman and his co-authors incorrectly.

Zucman and his co-authors find that per-capita income within the bottom 50% is unchanged from 1980 to 2014:

First, our data show that the bottom half of the income distribution in the United States has been completely shut off from economic growth since the 1970s. From 1980 to 2014, average national income per adult grew by 61 percent in the United States, yet the average pre-tax income of the bottom 50 percent of individual income earners stagnated at about $16,000 per adult after adjusting for inflation.

But the people they look at in 2014 are not the same people as in 1980. More of them are over 65 years old. More of them are immigrants. I don't think inflation is measured correctly. So perhaps stagnation does not capture what has happened to the bottom half of the income distribution.

When you do follow the same people over time as is done here and here, you find that not only do people in the middle and the bottom of the distribution have much bigger percentage gains than the people at the bottom. That challenges the claims you hear often that the "economy is broken" or "the rich are getting all the gains" or that the average American is getting none of the benefits of growth.

Kevin writes:

I want to step back and reframe this podcast as a comparison of two competing study designs. In broad terms in epidemiology the studies that follow individuals and show that there have been huge gains in income for the lowest are called cohort studies. The data the guest presented here of cross sectional population data are called ecological studies.

If several cohort studies had found that X->Y and you then stood up at a conference and announced that you used serial cross sectional studies and lots of fancy math and found that Y->X the correct response from the audience would be laughter and derision. This episode really highlights how economics is more an ideological front than science. If you have cohorts studies following people forward, no one cares about population level data anymore because the inherent flaws cannot be overcome by math. Theoretically with enough math a cohort can be made into a randomized study, but whenever we have a randomized studies we rate its evidence at a higher level than a cohort because its an inherently superior level of evidence at the fundamental level. The guests study is of the lowest level of evidence you could present in epidemiology and so its disagreement with better design highlights its failings, it does not cause me to question the superior designs only the ideology of the field.

The guest repeatedly said that the middle class is better off in several European countries. I don't know how he means that and I don't know if true, but I would be interested in comparing the proportion of income of the lowest quartile in Germany and the US to buy an iPhone, a 60 inch Sony TV, to go on a vacation to Disneyland, to buy the same quality house with the same size yard. Those are the measures that would be helpful to compare the countries and how the lower quintile is doing.

The guest hand waves how globalization impacts all nations equally. The US is a culturally dominant nation. Our GDP is roughly equal to the entire EU (500 million vs 310 million people). Name one European movie that made 200 million outside Europe in the past 5 years. I just looked up the top 20 corporations in the world. The EU will its 500 million has 4.5, China 3, Japan 1, South Korea 1, UK 1.5, and the US 9. Would it be surprising that we were concentrating more wealth?

The poster above who talked about heath care also captures a huge flaw in this approach. The skyrocketing healthcare costs have replaced wages for many people.

Finally, the continued analysis of inequality is of some interest but continues to feel morally dangerous as it tries to turn a vice, envy, into a policy position.

David Zetland writes:

It's pretty clear that Russ was grasping for straws a few times in this episode -- especially when Zucman was comparing income shares/ratios of France and the US. Yes, we all have better, cheaper toys, but income inequality still makes it harder for the poor to buy them... let alone HOUSING.

The US has claimed a "exceptional status" for a long time, but that status is now less exceptional in terms of per capita wealth, income inequality, social mobility, educational attainment and even environmental quality.

In 1835 Alexis de Tocqueville told us more than we know about ourselves. Now Zucman is playing the same role. It's time that Americans realize that they do NOT live in the best country (on every margin and maybe not on any margin) and put a little hustle in to making America great again. (Sadly the insane clown posse now screwing things up is heading in the other direction.)

Reggie writes:

Two quick points.

1) I was surprised how quickly and cavalierly the guest went from the data, which was huge and diverse, to four very specific, micro economic policy implications. Academics are usually more careful than to site a complex paper and then leap so far to individual policies without any substantiation. What was most frustrating was that Zucman's implication that those four policy topics indicted the US compared to Europe, while the largest counter example of that in the history of the world occurred during the exact same time period in China.
2) This China counter example would seem to invert the entire Zucman policy claim. Chinese workers are not free to join an independent union. There's a single state run union but it's not friendly to labor disruptions. Overall, the time period Zucman sites corresponds to China's economic liberalization and their application to the WTO. Regarding improvements for the poor since the 80's, CHINA CRUSHES all western countries. If we want to leap to policy assumptions, we'd have to assume that liberalization yields far greater equality than unionization and min wages, Germany and the west are child's play by comparison.

Bob writes:

@David Zetland

It's time that Americans realize that they do NOT live in the best country

France has something like a ~100% national debt to GDP ratio compared to the US ~108%, and growing. It's almost like the governments of both countries are poorly run, unable to pay for what they spend and continuing to borrow to fund their unsustainable policies year after year. :)

It's not all about economics either. I think we should be concerned about France living under a kind of martial law for the last two years for an "emergency" that never ends. Something similar applies to the PATRIOT and USA FREEDOM Acts.

Or we could notice that in France the government spending to GDP ratio is on the order of ~56% vs. something like ~34% in the US. Both absurdly high.

Seems like the governments of both countries have a lot of problems that are getting worse over time. Bigger government. More debt. Ever-more taxpayer money wasted on interest payments as the debt climbs. Less individual freedom. I'm sure you could make a case for either country being better or worse depending on which factors you care about most. Value is subjective.

Ajit Kirpekar writes:

A follow up. The guest harkened back to the good old days of marginal tax rates being above 90 percent. Not sure this is true given taxes as a percentage of gdp have been remarkably stable over this time and to the present. Not too mention, the percentage of taxes paid by the top has only risen over time.

But even still, what is the policy conclusion? 90 percent tax rates, unions, labor laws that force more employee compensations, minimum wages???

Here in Silicon Valley, I meet so many software developers coming from Canada and Europe extolling the greatness of their welfare state. When I ask what makes them come here...they scoff. Try getting a job in Europe that pays decently, blissfully unaware of the contradiction.

Steve Fritzinger writes:

While discussing the effect of immigrants on inequality, neither Russ nor Zucman mentioned the biggest population of "immigrants". Teenagers entering the workforce.

Every year millions of teenagers get their first job. Maybe the inflation adjusted of hourly value of these new workers hasn't risen much or at all. That would act as an anchor on the left hand side of the wage distribution.

Does anyone have data on how powerful this effect is?

Kevin English writes:

If you are to listen to Gabriel Zucman, you might think France and the rest of Europe are a kind of utopia because they have less income inequality. But if you visit Europe, you find more despair than hope. Youth unemployment is around 25% in France. In Greece, Spain and Italy, it is more like %40-50. Maybe if you are not working and not earning an income, you aren't counted in their data?

Also, this is very misleading to say that large European companies have union reps on their boards and there is a “compassionate” form of corporate governance there. Of France's largest companies, do companies like Carrefour or SanoFi really have union reps on their boards? Carrefour has stores all over China and Asia where employees work an average work day of 11 to 12 hour shifts. SanoFi refused to lower prices of its Zika vaccine even after Bernie Sanders berated them. Do we need to mention VW? I could be wrong and maybe my anecdotes are just dragging out the bad apples but at least on the surface level, it doesn’t appear the European corporations are better actors than others.

While it is a creative methodology to divide economic output by income and work backward to find what percentage goes to the top 1%, as Russ implies, it is not a good measure of total well being or progress since 1980.

Earl Rodd writes:

Re: The discussion at the end about "access to education." It was mentioned that the rates of college attendance (the wrong number, of course, graduation rate matters) are highly correlated with family income. This was not as true in the recent past. I started university in 1965 and many, many of us were first generation college students from families of very modest means (*). I think a couple of things have happened: 1) After the post-WWII democratization of college attendance, society sorted out into college and non-college families by personality and ability. 2) Today, low income tends to go with no family support far more than it did in my day, a key factor in educational achievement which means that even kids with natural college traits do poorly in school. Of course, a school structure that traps good students from poor families in terrible schools does not help.

(*) In those pre-student loan days, tuition at a top private school could be paid with a good summer job (e.g. the local steel mill). Tuition at a state school could be paid with any summer job.

Ajit Kirpekar writes:

@ Earl

A further point - more people are accessing college than ever before, including low income groups. They just aren't finishing.

This suggests to me -

1) finishing college says more than just what your family makes. It also speaks to what they teach you. I wonder what his correlation would have found if we did household education rather than income. In the former case - it feels like pure victimhood from a lack of resources. In the latter, it suggest a more fundamental problem; not about income but family dynamics.

2) tuition rates are so absurdly high that anything short of graduation certainty makes college a terrible investment.

How exactly are points 1 and 2 the fault of the stingy rich is beyond me. Nor does the answer seem to be more government funding through higher marginal taxes. Graduation rates have been pathetic for quite a while now even in the face of huge expansions in spending at all levels.

This gets to my biggest problem with the whole inequality redistribution agenda. Ok, so the rich have stolen everything. Ok the poor aren't getting a fair shake. But what ought we to do about it? I pose this to someone in the comment section - if the answer is redistribution - where has this been effective?

Mr. Econotarian writes:

Lots of thoughts about this episode, but let me start with the fact that while the bottom 50% of French income earners may on average make more than the bottom 50% of American income earners (thanks to higher legislated and union negotiated wages), a significant portion of French workers in that 50% earn zero market wages. Unemployment in France has been over 7% for 20 years, and over 9% for the last seven years.

My thought about the situation in France is that the labor code and union influence leading to higher minimum wages means that only the most productive workers stay in the workforce, and the least productive workers are pushed out. Indeed, hourly productivity shows that French workers skilled enough to be employed are very productive and competitive if not better some years than US hourly labor productivity (though the union deals and legislation mean that they work fewer hours than American workers).

The unemployed workers pushed out may continue to live on transfers from the high taxes on the workers left in the workforce. I will leave it to the reader to decide if this is a good outcome. Perhaps someday only the high-paid CEOs will have jobs and pay taxes, the robots will do all the rest, and the workers can just relax.

It is interesting that despite having such a well-educated and "equal" workforce, French GDP per capita (2016) is only $42k compared with $52k for the USA. French GDP per capita PPP is only $38k.

Regarding foreign born immigrants, the US and France are very close in percent of foreign born population, 13% for US and 12% for France. But only 55% of France's foreign-born population is employed (63% of foreign born males employed), compared with 69% in the US (81% of foreign born males employed).

Robert Wiblin writes:

"Unemployment in France has been over 7% for 20 years, and over 9% for the last seven years. ... the labor code and union influence leading to higher minimum wages means that only the most productive workers stay in the workforce, and the least productive workers are pushed out."

But France's Labour Force Participation rate is much higher, 72% vs 63% ( and

Mr. Econotarian writes:

Regarding the JFK upper bracket tax cut, President Kennedy proposed across-the-board tax rate reductions enacted in 1964 after his assassination that included reducing the top tax rate from 91% down to 65%

What happened? Tax revenue increased in 1964 and 1965.

What really happened was that much high-earner income came "out of the shadows" of tax shelters, and "into the light" of income tax.

For example, the JFK tax cut reduced the ability of high-income taxpayers to make unlimited charitable contributions to private foundations, often escaping all income tax liability.

It substantially tightened are the tax rules governing employee stock options. The option price now had to be least equal the value of the underlying stock at the date of grant; the option period may not exceed five years; and the stock must be held at least three years.

Personal holding companies became more tightly policed, and it became more difficult to shelter income from the upper individual tax brackets through use of an incorporated pocketbook.

No longer deductible were personal expenditures for a myriad of state and local excise taxes - such as liquor, cigarette, car licenses, and similar excise taxes.

The deduction of interest paid on systematic borrowings to pay life insurance premiums was ended. This eliminated a widely publicized tax plan which enabled high bracket taxpayers to reduce personal insurance costs. The bill also taxed compensatory benefits received in the form of group-term life insurance in excess of $50,000 a year.

It cut down are some of the advantages of widely advertised real estate tax shelters. Part of the proceeds of sale of real estate relating to "excess" depreciation would now be taxed as ordinary income.

The tax advantages of operating commonly owned businesses through multiple corporations was minimized.

And the dividend received credit was repealed, with income from dividends treated more like income from wages and salary.

So a lot happened in the 1964 legislation...

Mr. Econotarian writes:

Regarding US versus French labor force participation rate, I'm not sure if "TradingEconomics" is comparing apples to apples regarding age ranges.

See the OECD data:

For age 15-64, labor force participation rate in the US in 2015 was 72.6%, France 71.5%.

I suspect France doesn't report labor force participation rate for its entire population age range, because of course "everyone" is retired by age 64 (French pensions can kick in as young as 60).

Another interesting comparison is that France employs 51% of its 25-64 year olds who have below upper secondary education, but the US employs 57%.

But on the other hand, France employs 85% of its tertiary educated workers, compared to only 82% in the US (I suspect it is marginally easier for mothers to work in France than the US).

Floccina writes:

Low-Income Americans' Kids Can Go to College for Free

1. That is the title from an article in US News, it's actually wrong, it should say they go to school tuition free but that's close enough. I would say that state schools should be closer to where large populations live so students can live with their parents while in school. It'd hard to believe that cost is keeping the poor from going to college.

2. I hear this stuff and ask if GDP is up 60% and only the top 1% are up close to that then who is consuming all that production? Are the top 1% consuming that much.

3. If it's all capital gains did they measure that on the sale of the assets else it's not real?

4. Hard to believe public CEO pay is significant, what are there about 1,000 big companies. Never the less I do own some with Carl Ichan because he tries to lower CEO.

5. I like unions,IMHO USA union leaders have done a poor job.

zeropoundpom writes:

Russ Roberts,

I'm not sure I follow. If you follow the same people over 30 years, they will obviously be better off on average (unless something is very wrong in the system) because they are now 30 years older, have had raises, paid off their mortgages, gained skills etc. So it doesn't make much sense to use this as a response to the claim that the bottom 50% have not had gains over that time. Because the bottom 50% are not the same people 30 years on. The bottom 50% in 2010 are (roughly speaking) the 1980 bottom 50%s children. Surely what we are interested in is whether the equivalent person in 2010 is better off than the equivalent person in 1980. Not whether a person who is 55 in 2010 is better off than they were when they were 25 in 1980.

Or have I completely missed the point there? Does "the same people" not literally mean the same individuals in this context?

The comment about the ageing population and immigration is an interesting one, and a good point. It would be interesting to see what happens when you control for demographic variables (sex, race, native vs immigrant etc). I suspect that would make the picture less bleak, but I would still be surprised if the % of wealth accruing to the top of the distribution wasn't still running away from the rest.

Sam writes:

OK lots of problems but I will stick with three:

1. Globalization. The problem of the high incomes is unique to United States because there are three major industries that in which the American firms essentially went from national players to global powerhouses over the past 40 years or so:

  • entertainment: this would include sports, TV shows and movies;
  • finance: the Fed is the world's central banker and American financial openness combined with the size of American economy means that basically Wall St. operates as world's financial sector as well (note the only other place that comes close is London and Zucman mentioned how UK is the only other country that is similar to U.S. but much smaller in magnitude).
  • Tech: The big tech companies (Amazon, Facebook, Google, Microsoft and Apple) are servicing the entire planet. The French/German/... search on Google, shop on, and check their facebook on their iPhone while on break from work which is filled with computers that use Microsoft Windows and Office.
I wonder once you discount the part of 1% that belongs to any of those industries what is left to account for.

2. International comparison. First there was never any comparison about the overall growth rates. What are the numbers for other countries corresponding to the 1.4% figure for U.S.? We got the following countries as points of comparison: Germany, France and Scandinavian countries.

  • If German workers are doing well it comes at the expense of the European periphery not because Berlin adopted pro-union policies. You can't say Germany is doing well when it is paid for by the misery of mass unemployment in other countries. In late 1990s Germany was the sick man of Europe and all the recovery there has been due to introduction of euro and actually reforms that undercut labor unions (German's current account surplus was on the cover of The Economist for heaven's sake!)
  • Among the Scandinavian countries, we can discard Norway with its €700 billion sovereign wealth fund, Sweden is also an anomaly that has benefitted from euro, like Poland it has succeeded by easing more than the ECB and effectively growing at the expense of Europe. That leaves Denmark and Finland and here I will point out the folly of comparing a continent-wide multi-ethnic, multi-racial country of 320 million people to a tiny homogenous country in Europe but besides that I will reiterate the point I made earlier: what are the growth rates for Finland and Denmark? How much has Finland's per adult real income grown since 1980 compared to the 60% for United States? Have they recovered from the Great Recession?
  • France. Again I would like to see the overall growth number but that aside does the French system which is so wonderful in addressing inequality have any structural costs? Isn't Macron spending all his political capital to get reforms passed that actually undermine labor? Why is there any need for reform?

3. Immigration. In 1980 foreign born population in United States was 6.2% of total or about 14.1 million people. In 2013? 12.9% of total or about 40 million people. The guest mentioned France has had even more immigration, I am wondering what the numbers are there. And second the crucial important point here is the quality of immigrants or their skill level. Did France get similar levels of low-skilled immigrants as United States?

Sam writes:

This is specially directed at Russ since he seems to be under the spell of Silicon Valley: High-Tech Employee Antitrust Litigation.

Greg G writes:


Like zeropoundpom, I find your argument about following the same people over a lifetime to be so unconvincing I am worried that I am misunderstanding it.

I take your point that it would be relevant and interesting to study the effects of demographic changes on these issues but that's not what the two studies you cited in response to zeropoundpom do. They simply show that, as you would expect, people tend to increase their earning power as their careers advance and that family incomes that are outliers tend to revert to the mean.

The more your parents make, the more challenging it's going to be to exceed their incomes. The less they make the easier it should be. It is going to be a lot harder for Warren Buffett's kids to exceed his income than it would be for the kid's of an unemployed dad on welfare.

The Middle Ages were not known as a time of income mobility. But if your standard was following an individual life, you might conclude it was a time of income mobility as you saw an apprentice finally became a fully trained artisan over a number of years.

Also relevant to this inequality debate is the work of Charles Murray whose credentials with libertarians are pretty respectable. Please consider having him on the podcast. I think you will find he sees stagnating incomes and mobility in the bottom 50%.

john h penfold writes:

Reminds me of Groucho Marx, "are you going to believe me or your lying eyes". Impressive attempt to extract abstractions from abstractions to confirm a bias. Then use the abstract conclusions to refute any attempt at injecting reality. I think the only way to get at the question is to follow individuals through time as Dr. Roberts suggests. Trying to force it all to fit into national income accounts is interesting and may tell us more about national income accounts than the reality. He asserts a lot and Dr. Roberts politely questions all of it, but to assert that high marginal tax rates led individuals away from seeking greater wealth is very strange indeed. What it did, certainly among many other things, was change corporate board rooms and investor behavior. Corporations switched from profit goals to cash flow goals and capital gains. The results were perverse and probably contributed greately to wealth disparities, including among senior managers in giant corporations who benefited from the fact that their salaries only cost investors 10 cents on the dollar.

Floccina writes:

One more note of interest, if you took that 10% gain in total income (they used to get 10% of income in 1980 and now get 20%) that went to the top 1% of earners and spread it out proportionally over the bottom 99% you would raise their income by a little over 10%. A 10% increase in income is really nice but not life changing.

Dallas Weaver, Ph.D. writes:

Where to start with so many built-in biases in his thinking.

Let's start with the difference between a Geni coefficient calculated over lifetimes vs a snapshot for a year. I calculated my own Geni coefficient over more than a half of century as 0.701 which is very unequal. If you take annual snapshots of a group of people with similar lifetime Geni coefficients, you can have a very high group Geni with the group having the same lifetime average incomes and zero real inequality.

In other words, Geni and similar snapshot statistics can be meaningless in determining inequality, depending upon lifetime earning patterns or changes in those patterns (including increasing low-income time at universities).

He has an implicit assumption that everyone has the type of lifetime earning pattern that he has as a bureaucrat academic, where you get a job for life. As that is his life, his biases assume the same for everyone else and also assumes that different countries have similar distributions between people with steady incomes relative to those with highly variable incomes. These implicit assumptions are not necessarily true and their limited validity over time and by country has changed over the last half-century.

Such implicit assumptions can kill the relationship between claims of social/economic inequality and his statistical measurement methods.

He then goes on about tax rate effects referencing the 50's era of the US where tax rates were extreme. Being young and not living in that time allows him to think/believe that rich people paid those rates and they didn't impact all income decisions. I was was alive in that era and people who generated high income and wealth levels were in oil or real estate where they could bury reportable (included in income statistics and tax information) income with depreciation, amortization, depletion, exploration/drilling expenses, intangible expenses and dozens of other similar tax games. Wealthy people then put the wealth (including their yachts, airplanes, etc.) in corporations and paid corporate tax rates while showing very low individual incomes in their names on the tax records he quotes as providing income information. By playing the tax game correctly, the real income/wealth is all hidden and subject to the tax basis write-up upon death or by adding in a non-profit charity you could even bypass the "death taxes". This is how Howard Hughes obtained and funded all his expensive toys including all his custom designed racing airplanes and beautiful women without paying huge taxes and we ended up with The Howard Hughes Medical Institute (which has done fantastic research).

Of course with these high individual tax rates, you couldn't have the evolution of VC financing of startups where all the income came in one lump when it was sold or went public. As the transistor was invented in this high tax era, we didn't have VC's creating new companies to put the vacuum tube companies that owned the electronic business (think RCA) out of business. We had to wait until an unknown geotechnical firm (now called Texas Instruments) blew open the market.

The big decrease in the individual tax rates and lower capital gains rates combined with the evolution of chapter S corporations (taxed as individuals) created a shift of wealth from these hidden locations onto IRS 1040 filings while freeing up assets for more productive use.

These shifts in how wealth and income were reported could give the "appearance" of increasing "inequality" with no real change.

A real scientist (from the real STEM areas) would investigate the significance of these impacts upon his conclusions while a real propagandist would go with what sounds good to justify his opinions and biases. Russ should have taken him apart. What has happened to the non-STEM academics "thinking" over the last few decades?

Ajit Kirpekar writes:

Can someone in the comment section who believes incomes have truly stagnated for the bottom 50 percent(as opposed to the bottom 10 or 15 or even 20, but the whole 50 percent) tell me what they think the right policy prescription is? And then, if you could, please also offer reasons why the usual retorts about its unlikeliness to work are not correct.

Mike writes:

Thought experiment:

What if virtually all of the Americans spend part of their life in the bottom 50% and part of their lives in the top 50%? Would we care as much that the bottom 50% has not changed all that much?

Also, what if virtually all Europeans in the bottom 50% spend all of their lives in the bottom 50%. Would we care as much that they have had some real income growth over the years?

Russ Roberts writes:

Greg G (and zeropoundpom),

You both continue to misunderstand the relevance of my argument and perhaps the relevance of Gabriel Zuckman's.

I encourage you to read the articles linked above by Gerald Auten et al as well as to read the article from the Pew Foundation mobility project.

And I will try to devote another EconTalk episode to this topic in the near future.

Russ Roberts writes:

Dallas Weaver, Ph. D,

Nice job on tax strategy in a complex world. A number of people have raised similar issues about Zucman et al's findings being a function of taxpayer discretion in response to lower rates, particularly the 1986 tax reform. More on this coming, I hope, to a future EconTalk episode.

Andrew writes:

Hey Russ,

Just one quick point about your Google/Silicon Valley not abusing their employees. Several years ago there was an Anti-Trust and Civil Lawsuit against Apple, Google, et al. over collusion to prevent employees from getting better job offers, and thus to hold down pay. So here they were using their massive market-power to hold down their (admittedly still highly paid) employees wages.

Stéphane Couvreur writes:

Gabriel says that "most recent studies that follow the entire population of working age Americans using Social Security data, even when you do that, when you follow people over time, you see a huge increase in lifetime inequality."

Could you please point to these studies?


SaveyourSelf writes:

The comments attached to this podcast have been uncommonly high quality across the board. Thank you, everyone who took the time to write.

~ 17:00 Gabriel Zucman says ,”the bottom 50%, it's actually relatively easy to observe their income, because the vast, vast majority—almost all of their income, pre-tax and transfer, it's labor income. It's wages and salaries and self-employment income. And that income is typically very well-recorded by the tax data and the survey data.”

In addition, at ~ 14:00 Gabriel Zucman says, “And you have a third category of income that you see—neither see in tax data nor in survey data—things like, corporate retained earnings, for instance, which have increased a lot since the Great Recession.”

  • I remember an old Econtalk podcast on the subject of Spain, where the guest claimed that the economy in Spain was not nearly as bleak as reported because the reports were based on tax data and only half of Spain’s true economy filed taxes. I believe the same hindrance is present in Zucman’s analysis and for the same reasons. He puts great faith in tax data and surveys, but he doesn’t even mention in his list of income that falls outside of his sample, black market transactions. He assumes, I guess, that American’s don’t have a black market. Let me correct that mistake here, though, it does have a black market and it is enormous and, further, it is almost entirely populated by the “bottom 50%”. Think about it. Black market transactions are not difficult. Trade cash for services. Provide no receipt. No records exist so there is nothing to file. Why not keep records? Why not report earnings accurately? The reason is obvious. In the USA, 49% of the population receives government handouts. Reporting an increase in earning to the IRS reduces those government handouts. Thus, there is a VERY strong incentive, for people in the bottom 50% of earnings categories to report NO GAINS over time. Which is what Zucman’s research, I think, correctly demonstrates.
  • Unfortunately, because Zucman is blinded by his faulty assessment of the circumstances and faculties of the poor, he incorrectly concludes that the pattern he and his colleges have identified is due to wealthy people stealing the rightful true gains from the poor. When, in fact, it is precisely the other way around.
~38:00 Gabriel Zucman says, “if you compute average tax rates by income group, taking into account all taxes at all levels of government, you find that the top 1% average tax rate is a bit higher than the average macroeconomic tax rate in the United States, which is 30%. You find that the bottom 50% average tax rate is a bit below 30%. But the difference is very small. That is, you know, all together, the tax system in the United States is barely progressive.”
  • This is a pet peeve of mine. A flat percentage tax IS a progressive tax. 5% of $100 is $5. 5% of $100,000 is $5000. Same—flat—percentage, but the wealthy person paid 1,000 x as much. THAT’S A PROGRESSIVE TAX, especially since both are purchasing the same services. Wait, scratch that, in the US the person earning less receives FAR MORE services. That means a flat tax in America is actually PROGRESSIVE ^ squared. If you then discount the math entirely to make the % rate progressive, you’d have PROGRESSIVE ^ cubed. A cubed difference in services provided relative to taxes paid makes the term, ‘unfair,’ something of an understatement. I’m not sure there is a term to describe such lopsided accounting. Maybe, ‘unfair to the third power.”
~44:00 Gabriel Zucman says, “Household debt skyrocketed before the financial crisis. The saving rate of the middle class and the working class has collapsed. What we find is that in the 10 years before the great recession, the saving rate of the bottom 90% of the wealth distribution was actually negative. So they were consuming more than their income. And that’s a big part of the macroeconomic story and also can help reconcile the trends in consumption…”
  • Well, yeah. But again, that’s not because of theft by the wealthy. It’s because the legislature and the Fed have enormous and wide ranging policies that benefit borrowers at the expense of savers. As a side note, it is no coincidence that the US government is the largest debtor in the world.
~49:10 Gabriel Zucman says, “All together, I think, the results we have suggest that, broadly speaking, ‘Policy’s,’ matter a lot. And policies affect the pretax and transfer distribution of income. And they matter a lot because if they didn’t matter we should see more or less the same trends in all the worlds developed countries as in the US. And that is not at all what we see.”
  • Policy = coercion. The level of coercion in a society does, indeed, matter a lot. The greater the coercion present in a society, the lower the level the predicted economic productivity. Coercion and violence are the antithesis of productivity.
  • Which leads me to my answer to Ajit Kirpekar’s excellent question. Kirpekar wrote, “Ok, so the rich have stolen everything. Ok the poor aren't getting a fair shake. But what ought we to do about it?”
  • Answer: Seek out the coercive institutions that allow some individuals—rich or poor—to steal from others and abolish them. If no such institutions can be found, then that can only mean the rich are wealthy because they provide uncommonly good services for uncommonly low prices, in which case we should emulate them, not hinder them.
66:00 Russ Roberts said, “Usually market forces tend to result in higher salaries when taxes go up and lower salaries when taxes go down.”
  • I just can’t wrap my head around this, Russ. Does this mean the take-home salaries are “fixed” by the market and taxes are just passed on to consumers as higher prices?
68:00 Gabriel Zucman says, “in European countries where salaries tend to be fixed by rigid salary scales and much less by pure market forces which don’t necessarily give you a wage equal to a marginal product depending on the competition that you have.”
  • “…where salaries tend to be fixed…” So price fixing is the solution? Zucman is an economist. Surely he knows about shortages and surpluses and monopolies and all the other nonproductive activities economic actors have to undergo to ameliorate the ugly outcomes produced by price fixing. Surely he and his colleagues are not suggesting policies that fix prices will make the world a better place. Surely…

Ben Riechers writes:

I was relieved to hear you push back on many of the assumptions of Gabriel Zucman that formed the foundation for his study and on his conclusions of that study. I didn’t realize when I was listening that Thomas Piketty was part of this study. I’m reminded of an observation I once heard, “We will torture the data until it tells us what we want to hear.”

As I was listening, I immediately thought about a study from 1995 titled, “The Truth About Income Inequality” by John Hinderaker, (now head of the Center of American Experiment) and Scott Johnson (contributor at that I read several years ago. I don’t claim to know if it was perfectly done, but it made some of the same points you made about tracking individuals through their lifetimes. has a post today that takes a very different look at income inequality than is heard by those advocating for yet more government intervention.

My concern and perhaps yours (though I don’t recall you voicing it) is that few will hear Mr. Zucman’s own caveats about their study. Headline conclusions won’t carry caveats about the assumptions or the conclusions. It reminds of the differences between the IPCC summary and their more detailed climate report which carries many more caveats about just how settled the settled science really is. The very notion of settled science seems oxymoronic. I bet there are scientists studying gravity and it makes sense that they would.

Finally, I am reasonably certain that the tax reform of 1986 put a limit on salary deductions. If my memory is correct, it follows that this change was a catalyst for the misuse of options (IMHO) by compensation committees. It is by far the largest driver of the growth in CEO compensation and particularly its explosive growth in the 1990’s according to an MIT study from about 10 years ago. I’m a big believer in the law of unintended consequences and suspect that this change in tax law complemented with preferential tax treatment of option income (somewhat reduced during the Bush administration) led directly to the skew in CEO compensation that we have witnessed. The current approach abandons any marginal contribution theory probably because it is hard to measure. Being hard to measure doesn’t justify ignoring it. Maybe they should interview CEOs with pro formas in mind and identify the upside of a top CEO vs. what the company would achieve with just an average CEO assuming an average CEO candidate would have an extraordinary skill set, likely very intelligent and knowledgeable and who operates with high moral standards and ethics in the interactions with people.

Bee writes:

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Chase G writes:

Having not read the paper I don't want to jump to conclusions about how the authors used tax data to measure income, but two main concerns came to mind. The first was articulated by Earl Rodd above, that this method could fail to adequately measure fringe benefits in the US, in particular health insurance. Another concern is his assertion about the reliability of tax data with respect to labor income. There are studies indicating that the income of self employed workers is often significantly underreported on tax returns. The authors may have already addressed these issues.

Seth writes:

Do he mention if there was a difference in age composition of the bottom 50 in France and the U.S.?

If the average or median age of the bottom 50 in France is higher than the U.S., then his last key finding may not be good.

Just eyeballing some stats page, it looks like France has about 5% more overall 65 and older and 5% less 20-34.

Here and here.

Ajit Kirpekar writes:

@ Saveyourself

Thank you for the kind acknowledgement, though that question was really posed for someone more sympathetic to the view of a benevolent steering government(note the anodyne language commonly used to paper over theft, coercion, and violence).

On a deeper level, I often wonder what would happen to inequality if we removed so many of the pathologies in our education, healthcare, and welfare systems? In some sense - this would encourage more free movement into high paying labor sectors, which would drive down the skill premium(or allow more immigrants which would also have that effect). This would also keep welfare for the truly unfortunate, rather than the perpetual narcotic it is that ruins the lives of its recipients.

On the other hand, acquiring such skills is hard and most people probably don't find the time and investment worth it, even with the higher salaries offered. I take that as a good sign in a way - it suggests being middle class or lower middle class is actually quite comfortable compared to the old days where lower middle class meant living till your late 30s and losing a child or two to mortality.

This is something I think Zucman never really answered head on. He was stuck in the view of tax receipts, but never thought through the real implications. 0 progress over close to the 30 + years?? Does he really believe someone in their mid twenties in the bottom 50 percent was no better off than 30 + years ago with all the advancements in medicine, transportation, and the internet? How does that reconcile with increases in literacy, decreases in mortality, and on the job disability? Or in general the amount of access to television, fresh water, cell phones, cars, etc etc? Or does he reconcile this by suggesting almost all of the innovations were geared to services and gadgets for the top 50 percent?Concierge medicine, diamond encrusted laptops, and a suite of cars and yachts for todays silicon valley fat cats?

Andrew Wagner writes:

I took away two major points from the January 2nd episode with Mark Warshawsky:

1)Rising cost of health insurance in the US has had a disparate effect on American workers depending on where they are in the income spectrum.

2)It's damn hard to get good data on the cost of these benefits.

Which begs the question, with all the other ways that Zucman et al have had to process and slice data to get their results, are they talking about cash income alone, or do they include the value of benefits (primarily healthcare)? If healthcare costs are not included, there's a bit of an elephant in the room when it comes to the comparison both between Top and Bottom quintiles *and* between nations.

Kevin Ryan writes:

A few belated comments on this podcast.

I had heard Zucman speak on another podcast so I was pleased to see Russ was interviewing him. Zucman comes across to me as a serious conscientious guy trying to do proper analysis. That said, it is clear that he has his biases - he's not alone in that, of course, and I have no real idea if these tainted his analysis.

So a general point I would make is that it seems to me that there is a need for a serious piece of unbiased work reconciling the studies of Zucman et al and Auten et al.

On the Auten work, I share the suspicion of some others that a lot of what Auten is picking up is a pattern of income increasing with age and experience - which is something I have certainly experienced myself, although I do not pretend to be in the bottom 50%. But my income has now fallen sharply as I have retired, and I wonder if it is fair for Auten to exclude retirement age people from his analysis.

As to the discussion on Zucman's work, I thought there were a couple of important conclusions raised which then got glossed over:-

a) After taxes and transfers the income of the bottom 50% had increased by 20% over the period. Not brilliant of course, but not the same as "no increase in economic wellbeing"

b) Since 2000 the rise in the share of the top 1% has been due entirely to capital income and not labor income (where it may even have declined)- see before the 1.04.07 time mark.

I assume this conclusion is largely driven by Piketty's input to the study. Although I note that Piketty is somewhat rubbished in the following podcast - the Auerswald talk.

A couple of other points:-

Given Zucman's previous work on tax shelters, I was surprised there was no acknowledgment that tax evasion might be distorting the figures - at either end of the spectrum

I certainly agree that the household versus individual person issue is important, but I did not understand its particular relevance to the discussion of Zucman's study.

I look forward to the promised further podcast on this issue. In the meantime I will try to read the links that Russ recommends.

Tim writes:

I have a suspicion about where Zucman's figures might be very wrong. He says " ... things like, corporate retained earnings, for instance, which have increased a lot since the Great Recession ...". From this phraseology, I assume he is effectively adding corporate retained earnings to net wealth of the rich, which would be logical.
In my experience, macro economists understand corporate accounting very badly. Corporates have a big incentive to state their income position as optimistically as possible (to put it politely); much more so than governments whose income is generally less volatile.
Retained earnings in corporate accounts are essentially an income statement issue. Retained earnings are last year's retained earnings plus this year’s net income minus dividends. Simple. But what happens when companies borrow? Well, that's positive for the income statement, negative for the balance sheet.
The difference between the US and France is that US corporates have been borrowing like wild things over the past decade, sensibly as it happens because interest rates are very low, lower on average than those in France. The higher level of borrowing is also a function of higher business confidence in the US. Corporates generally borrow to invest, and that adds to the value of companies, which tends to add to top end wealth. But that's not a bad thing, its a good thing!
I haven’t studied his work, but I suspect Zucman's very obvious disdain for free markets and capitalism in general encourages him to see retained income as a negative, because it shows in his mind that the rich have become unfairly richer, because their corporate investments have become more valuable. But actually, it shows the opposite: it’s a reflection of US corporate confidence - and relative French corporate pessimism. One very easy way to see that is to compare the CAC (up 176% since 1994, ie basically flat if you take into account inflation) against the S&P (up 441% since 1994).
Its a terrible thing to say, but I find people like Zucman and Pickety infuriating because they so obviously come at issues with preconvieved ideas, even while I applaud their desire to see a fairer society. I really enjoy your podcast and I’m an avid listener, but in this case, I found it frustrating that you didn’t expose more explicitly the way his bias affected his calculations. The French have an enormous vested interest in statist solutions going back as far as Napoleon for all kinds of historical reasons; its crucial they should not be allowed to dictate this debate without serious, in-depth critique. Perhaps that will come in time, and possibly the retained earnings paradox might be one avenue to explore.

Martin writes:

As we get more efficient at producing things, we expect the benefit to be "fairly" divided between those who invent/cause the efficiency gain, and the rest of society. Zucman's claim is that gains since 1980 didn't accrue to the bottom 50% of society.

He adjusts earnings using CPI, but CPI purposely doesn't include these gains!

As a specific example, in 1980, CPI included the cost of developing film. With the invention of digital photography, that cost went to zero, and that "gain" was shared by both upper and bottom earners. But when people stopped spending money developing film, CPI stopped including it, so when Zucman inflation-adjusts wages, he'll see the increased wages of engineers at Canon and Nikon, but not the decreased costs of living those engineers created and shared with the world.

As another example, CPI measures how much a gallon of motor fuel costs. So Zucman might point out that bottom earns can't buy any more motor fuel now, than they could in 1980. Sure -- but they can drive 50% more miles, and they can afford do it in a car with features they couldn't afford in 1980 (air conditioning, power steering, automatic transmission, windows, buttons, etc).

Zucman's result is entirely expected. In 1980 and in 2017, unskilled people who work an hour earn the ability to buy a little less than an hour of unskilled labor. Duh. That will never change, nor should we expect it to.

Zucman's inflation adjustment wipes out those gains by using a metric which purposely devalues or completely removes from the basket goods that got cheaper.

stuart writes:

No! No! No! In my quote below, Zucman is wrong, at least he is from 1979 to 2005. Russ, why did you agree????

Here's the federal data from 1979 to 2005

1 - The federal tax rate on the bottom 50% was not lower, at least not in 1979. It was higher than 2005, despite increases in payroll taxes.
2 - The federal tax on the 1% has been and remains above 30%. Surely it is significantly more including state and local.
3 - The federal effective tax rate is not "barely progressive" across income levels. There is a huge difference that has not significantly decreased. Surely state taxes have not become less progressive/more regressive to an extent to makes Zucman's statements even close to true.

Zucman says:
"The overall tax system in the United States, if you compute average tax rates by income group, taking into account all taxes at all levels of government, you find that the top 1% average tax rate is a bit higher than the average macroeconomic tax rate in the United States, which is 30%. You find that the bottom 50% average tax rate is a bit below 30%. But the difference is very small. That is, you know, all together, the tax system in the United States is barely progressive. It's close to a flat tax where everybody almost pays 30% of their income. And that's a big change compared to the 1960s and 1970s where the top 1% average tax rate was significantly higher and bigger than the average tax rate; and the tax rate for the bottom 50% was significantly lower, below the average tax rate."

bogwood writes:

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Bogart writes:

Several points that need made:
1. These studies seem to start after 1980. The reason is that the low taxing Reagan under the advice of Greenspan passed a massive increase in Social Security taxes. The largest wealth transfers in the history of the world: Social Security and Medicare hurt wage earners as these mechanisms transfer trillions from poor wage earners (Many of whom are minorities) to wealthier retirees.

2. Prior to 1960 the 90% marginal tax rates applied to only a few types of income. Now most income types are taxed in some way. Furthermore there was no stupidity like the "Alternative Minimum Tax" to hammer middle class small business operators. Furthermore with a more stable currency linked in part to gold there was not much bracket creep where people moved to higher tax brackets with the devaluation of currency.

3. There never is any mention of the most significant difference between the USA and other wealthy countries which is the size of the Military/Intelligence/Security State. This series of institutions is massively greater in the USA than elsewhere and all of this spending (Mostly loaned) could go in part to the populace via Welfare State transfers or more preferred by paying off debts to allow for currency appreciation.


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