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Data Wonk For the 99 Percent: The Shy Academic Who Diagnosed Income Inequality

August 21, 2014
by Ben Christopher
Infographic of wealth distribution

You may not know him by name, but you certainly know his work.

If you’ve ever bemoaned this country’s widening income gap; if you’ve ever been to an Occupy protest and loudly proclaimed yourself a member of the 99 percent; if you’ve ever tried to trace with your finger the squiggly graph line depicting the income of this country’s wealthiest elite falling and than rebounding, Grand Canyon-like, across the 20th century; you were almost certainly citing the work of UC Berkeley economics professor Emmanuel Saez. A winner of the John Bates Clark medal (the “up and comer” award of the economics profession and about as close as the field gets to a predictor of future Nobel-dom), he has made his brief but high-flying academic career out of diagnosing and prescribing policy solutions to economic lopsidedness here and abroad. In recent years, his stats, graphs, and estimates have become frequently touted by those in search of academically-certified proof that the game is in fact rigged.

But rarely is it Saez who does the touting.

In his outsized influence on the debate over economic inequality, Saez stands alongside the likes of UC Berkeley professor Robert Reich, Nobel Prize winner Joseph Stiglitz, and his frequent research collaborator and fellow French countryman,Thomas Piketty. But while Reich, with a recent documentary film credit to his name, is a regular on the commentating media junket, Stiglitz is a prolific writer of layperson-ready economic polemics, and Piketty is the unlikely best-selling author of the widely sold (if somewhat less widely read) Capital in the Twenty-First Century, Saez prefers the dignified quiet of the ivory tower.

“It is actually very hard to do both a lot of media talk and academic research,” he says. Though he is “delighted” by the post-recession interest in inequality—his principal focus since earning his Ph.D. from MIT in 1999—he says the “true test” of his research will be whether it convinces policymakers to start leveling the playing field. In the meantime: “This is real work that takes up a lot of energy.”

Saez has spent the bulk of that energy in his small rectangular office on the sixth floor of Evans Hall. The western-facing windows may offer a 1-percenter’s view of downtown Berkeley and beyond, but otherwise, as anyone who has taken a class in this stuffy cinder-block of a building can attest, the Ivory Tower metaphor falls flat.

Between 2009 and 2012, 95 per­cent of the in­come growth in the United States went to the top 1 per­cent, while the rest of us saw our “re­cov­ery” take the form of a round­ing er­ror.

He doesn’t seem the bells-and-whistles type anyway. Outside his office door, a simple paper sign welcomes visitors to the Center for Equitable Growth. Inside, there is a desk, a few crowded bookshelves, a large computer monitor (the better to display century spanning historical income graphs), and little else in the way of decoration.

The aesthetic matches the academic, who is polite, but reserved. At 41, Saez is tall, lanky, and handsome in the sweater-loving, comb-averse way favored by professors. The son of schoolteachers from the Basque Country along France and Spain’s Atlantic border, he has acclimated with seeming ease into California casual:  He was out surfing when officials were trying in vain to reach him to announce his Clark medal (They finally reached his wife, who had to walk down to the beach and pull him out of the water to tell him that he’d won one of the most prestigious prizes in economics.)

In sum, his demeanor is remarkably cool for someone dedicated to a subject so conducive to heat.

For Saez, who was once referred to in the New York Times as “a shy data jock…[who] has probably done more than any pundit or political spinmeister to shape the political narrative of our age,” the numbers don’t need to be accompanied by screaming and shouting—they speak for themselves.

Lately the bulk of those numbers have come from the massive sets of national tax filings that both Saez and Piketty deploy. Their trans-Atlantic academic partnership began in 1995, when Saez was an undergraduate math student flirting with economics in Paris and Piketty had just returned to France after a two-year assistant professorship at MIT. With shared academic interests, political values, and hyper-numeracy, Piketty took on Saez as an informal protégé. Once Saez wrapped up his dissertation, the two began working as professional peers on the World Top Incomes Database, an online repository of decade-spanning data for 30 countries that paints a picture of just how income has been divvied up around various Western economies.

From these statistics comes the stuff of Occupy talking points. Example: between 2009 and 2012, 95 percent of the income growth in the United States went to the top 1 percent, while the rest of us saw our “recovery” take the form of a rounding error. Or: the top 10 percent in the U.S. now take in more than half of all national income—a higher share than at any other point since 1917.

Their analytical method, according to Saez, also yields a remarkably obvious conclusion. When it comes to inequality in America, he says, it’s the policy, stupid.

Map of the USA
Posters such as this helped galvanize protesters of income inequality.

For exhibit A, look at the 20th century in the United States. In the first few decades, the total income share of the most moneyed percent was remarkably high, before falling sharply during and after World War II, holding flat for a few decades, and then beginning to slope upward again around the early 1980s. Now compare that to the top marginal tax rate on income. The pattern is flipped. Rates start low, bound upwards during and after the war, stay high through the late 1970s, and then start to fall.

Throughout the 20th century, tax rates and income inequality in the United States have acted like a seesaw. One goes up, the other goes down.

Nor is this a coincidence, in Saez’s view. More generally, larger governments across the world tended to correspond to lower levels of inequality.

“One century ago, all advanced countries today had small governments and very high levels of inequality. Then governments have grown in pretty much all countries, in some more than others. Sweden has a bigger government than the U.S. and inequality has come down significantly.”

This explanation may seem perfectly obvious, but it’s also not the explanation that you often hear about inequality. Instead, pundits will point, with a sigh and a shrug, to the twin inevitabilities of modern capitalism—globalization and automation. Inequality is skyrocketing, we’re told, because well-paying blue collar jobs have been underbid by low wage workers abroad or by high-tech robots at home who, with ever-increasing computational power, have edged America’s workers off of the assembly line. This analysis is quite fatalistic: If inequality arises from the inevitable expansion of trade and tech, then there is nothing to blame but the system itself.

Saez offers a much more politically galvanizing explanation: Inequity is in fact a choice—and one that policy makers have made on our behalf.

If it were as simple as blaming globalization and hi-tech, forces that permeate developed countries the world over, we would see inequality rising more or less equally. But that simply hasn’t been the case, he argues. The top 1 percenters in the United States, for example, have seen their share of national income rise from under 8 percent in 1970 to just under 20 percent in 2010. A similar pattern is seen in Canada, which also adopted the same esprit de laissez-faire that made Reaganomics the hallmark of United States fiscal policy in the 1980s.

In contrast, over the same period, the top 1 percenters in Japan saw their share of national income inch up from 8 to 9.5 percent. French and Swedish plutocrats were similarly deprived.

“They are able to make cars in Japan and in Germany while competing with much lower-income countries and while keeping relatively good jobs for workers. So it’s not like technology will everywhere have the same effects. It really depends on how the country is organized,” says Saez. “In democratic societies, really, you have to choose what type of capitalism you want.”

Plus, according to Saez, blaming inequality on outsourcing and automation focuses on the wrong villain. Wage stagnation among the working and middle classes may be a serious economic and social concern, but in the United States, inequality hasn’t skyrocketed because the lower half has fallen behind—it’s because the rich have pulled so impossibly far ahead.

“What Piketty and I have shown is that a lot of the inequality is driven by what happens at the top. That is, how well the top is paid and especially how much wealth the top owns,” he says. And this isn’t because Fortune 500 executives have just gotten that much better at bargaining and badgering. According to Saez, you can’t blame this all on Gordon Gecko.

“The reason why greed wasn’t good in the United States in the 1950s and 1960s was that there were policies—progressive taxation, namely—that were there to make greed not worth pursuing,” he says.

Photo of protesters
Resistance at an Occupy Wall Street demonstration.

So inevitably, egalitarians eye the tax code. If the very rich are making too much money relative to the rest of us, why not just stop letting them make quite so much? In a 2011 paper that he coauthored with MIT professor and Nobel Laureate Peter Diamond, Saez set out to find the “optimal” top marginal rate—attaining the presumed benefits of greater income equality while avoiding the presumed costs when over-taxed executives start working less and tax-cheating more.

Putting some ornate mathematics to work, the two economists came up with a highly specific and politically impossible figure: 73 percent.

And if that’s too high, they concede that even boosting the top rate to 43.5 percent would still give the 1 percenters more than twice the share of after-tax income they enjoyed a few decades ago.

Still, income taxes on the largest earners would address only part of economic inequality. Income, after all, is just the money a person makes. It tells us nothing about that person’s sprawling estates and burgeoning stock portfolio. After all, Facebook founder Mark Zuckerberg only makes an annual salary of $1.

When looking at how first income inequality and then wealth inequality have swelled over the last few decades, the timing is telling. Income begets wealth and wealth begets even more wealth. The 1980s may have seen the advent of the mammoth executive compensation package, but it wasn’t until the 2000s—about the time that many of those well-heeled executives started passing on their inheritances—that the so-called wealth gap started to skyrocket.

Nearly everyone has been left in its exhaust. Though the popular rhetorical framing speaks of the 1 percent versus the 99 percent, as Saez points out in a recent study with London School of Economics professor and UC Berkeley post-doc Gabriel Zucman, the “merely rich”—those who sit within the top 1 percent of the country’s wealthy pyramid, but tragically below the ultimate top 1/10 of that cohort—have seen “almost no recovery” since inequality’s nadir in the mid 1970s. Pity the top 10 percent who, excluding the very, tippy, top, have actually seen their share of the national wealth pie shrink and stagnate over the last few decades. Instead, the nation’s spoils belong largely to the 0.1 percent (and even more so, the 0.01%).

 “We Are The 99.99 percent” is not as catchy a slogan, but it’s more accurate.

Almost by definition, wealth is the province of the wealthy. But this recent upward skew is a new and troubling phenomenon, says Saez. As wealth inequality continues to inch up,  the U.S. economy—long unique among many Western countries for its “ownership society” and its sizable wealth-owning middle class—begins to echo the economically sclerotic and politically fractious vibe of Europe on the eve of World War I.

“Now that trend toward the democratization of wealth has reversed. Now the bottom 90 percent owns something like 25 percent of total wealth and the key reason for that is because they’ve taken on a lot more debt,” he says.

Meanwhile, at the top, there are families like the Waltons, heirs of Wal-Mart founder Sam Walton, who have collectively socked away more wealth than the bottom 42 of all Americans combined.

And more people are likely to find that disparity galling.

 “The public is typically willing to accept the fact that there is going to be inequality in labor income because some people have more energy, more skills, or are more talented at developing businesses,” Saez says. But for wealth: “That is a type of inequality that is much less likely to be so well tolerated. And I think that’s the key reason that the book by Piketty has had such successes in the United States. Because he warns, given the development that we’ve seen and the logic of the system, we will see more wealth inequality in the U.S. and the development of a class of inheritors of very high wealth who may not have worked at all.”

The prospect of a Walton-dominated economy might get your blood boiling, but that’s only if you’ve already bought into one very important premise: extreme inequality is a bad thing.

Not everyone does.

If the poorest mem­ber of so­ci­ety is healthy, happy, and com­fort­able, what does it mat­ter what his or her boss is mak­ing?

In response to some of the rhetoric of Occupy-era progressive populism, conservatives have argued that the what matters isn’t inequality per se, but poverty. This was exactly the argument that sprouted up in outlets such as Reason, Fox News and in David Brooks’ New York Times column to beat back the surprise success of Piketty’s book.

“If you have a primitive zero-sum mentality,” Brooks wrote, “then you assume growing affluence for the rich must somehow be causing the immobility of the poor, but, in reality, the two sets of problems are different, and it does no good to lump them together and call them ‘inequality.’ ”

Or, to put it another way, if the poorest member of society is healthy, happy, and comfortable, what does it matter what his or her boss is making?

Martin Feldstein, a Harvard economist who served as a chief economic advisor to Reagan, wrote in 1999 that the reality of “higher incomes for those at the upper end of the distribution is, I would argue, a good thing in itself. They add to the income of wealth of those individuals without reducing the incomes and wealth of others.” More recently, Feldstein has disputed the entire premise that income inequality is increasing by suggesting that Saez and Piketty’s use of pre-tax income data ignores the role that social welfare plays in closing the income gap.

Saez concedes that government payments and services to those on lower rungs of the economic ladder have increased since the 1960s—but at the same time that taxes at the very top have plummeted.  “So, if anything, adding taxes would make the increase in income concentration even bigger.”

As for why inequality matters at all?

Saez contends that understanding it better would reshape our understanding of economic growth. For example, touting an increase in our Gross Domestic Product might seem somewhat meaningless to the 99 percent once it’s known that the lion’s share of that growth flowed to the top 1 percent.

Second, when resources cluster in the hands of the relatively few, that’s also liable to skew politicians, and thus public policy, in their favor.

More than anything, Saez seems convinced that inequality matters simply because people generally think it matters. The consummate economist, he says he has simply crunched the data and explained it to us. The fact that so many have written, argued, campaigned, and taken to the streets as a result is testament to its importance. But how we deal with it is entirely up to us.

“If democracy reflects the views of the people and people feel that it is just to share a fraction of our incomes, then the question is how much should we do it?” he says. “And societies will choose different numbers.”

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