Setting the stage
UC Berkeley Economics Professor Emmanuel Saez recently updated his income-share spreadsheets through 2010, using data from the IRS’s Statistics of Income Division. This series includes capital gains, which results in more dramatic swings than one sees in series that exclude them.
Including capital gains real incomes fell 17.4% between 2007 and 2009, the largest decline since the Great Depression. Within that the incomes of the top 1% were down 36.3%, largely the result of the 74% decline in realized capital gains between 2007 and 2009, while those of the lower 99% were down 11.6%.
Painful for all, indeed, but skewed to the upper income groups, a trend that had more than retraced itself by the end of 2010, the most recent year of IRS data. Between 2009 and 2010 the incomes of the lower 99% rose only 0.2% while the incomes of the top percentile rose 11.6%, meaning that close to all the over-the-year improvement in income, when adjusted for population, was captured by that top percentile, 93% of it to be exact. (See links below for more data.)
That puts some numbers on why the recovery is experienced so differently by ordinary wage earners and by elite income groups, which in turn has surely heightened public awareness of our growing income disparity.
But there’s another big question out there. Whether you’re rooting for the upper or lower percentiles, if you spend a lot of time looking at income distribution tables, you can’t help but wonder why there is so little popular support for redistribution toward the middle classes, especially as the share of income going to the wealthiest citizens has risen toward levels last seen in the Roaring Twenties:
Piecing together what people think
In “The American Public Looks at the Rich,” sociologists David Weakliem and Robert Biggert round up a number of opinion polls on the subject taken over the last five decades and suggest some answers.
We’re re-quoting their opening quote because it’s a bit hard to remember that concerns about “tyranny of the majority” related to taxation have a long history. Back in late 19th Century England, as property restrictions on voting weakened, John Stuart Mill fretted, “…is it not a considerable danger lest [the majority] should throw…upon the larger incomes, an unfair share, or even the whole, of the burden of taxation; and having done so, add to the amount without scruple, expending the proceeds of modes supposed to conduce to the profit and advantage of the labouring class?”
Although American workers have fought for wages, unions, and benefits, why a push for inequitable tax burdens (some would say even equitable tax burdens) on the rich feared by Mill and his colleagues has never gained traction remains an open question. After reviewing polling evidence, Weakliem and Biggert note, “There is little support for direct redirection from the rich,” and, “Even the general principle of progressive taxation does not draw clear majority support.”
The paper is thoughtful, even-handed, and a refreshing break from dreary speculation that the lower-income groups are dominated by a disproportionate share of misguided lottery enthusiasts. The comments of the authors suggest a far more complex picture.
For one thing, the authors note that Americans are not opposed to higher taxes on the rich– 59% of respondents to a 2011 poll favored higher rates for families making at least $250K—but they don’t have much faith in the government’s ability to accomplish this. In one poll that inquired about the government’s ability to provide health care, college education, day care, and a few other services, “reducing the difference between the rich and poor” was the only item for which a larger percentage had had “no confidence at all,” rather than “a great deal of confidence.”
One pollster notes that since the 1980s “people have told pollsters that the rich, not themselves, will benefit from budget agreements. It does not seem to matter what the contents of the agreement are or whether they are negotiated by Republicans or Democrats.” Widespread belief that the rich get out of paying taxes leads respondents to believe that additional revenues intended to come from the wealthy would fall instead on the middle and lower incomes.
For another, poll respondents did not have an accurate idea of how big the current income gap is, and were in the dark concerning America’s international ranking in terms of economic equality. The authors found that although respondents were quite accurate in estimating compensation in a number of professions, they “dramatically underestimated” top executive incomes. For example, estimates of what CEOs and owners of large factories make were less than half the official estimates of actual salaries, as pieced together from a number of sources. Additionally, the margin between what respondents think executives make and what seems fair to them is considerably smaller than the margin between what respondents think executives make and what they actually make. (The authors note that respondents might have made more accurate estimates had they been asked about entertainers and athletes, rather than business-people, and that doctors’ and lawyers’ salaries are often over-estimated.)
In a 2006 poll, the respondents optimistically gave the US a mean ranking of 15th out of 32 industrialized nations in terms of economic equality as measured by income ratios. Our actual ranking was 28th, with only Mexico, Turkey, Hong Kong and Singapore more unequal.
And for yet another, across a number of polls, respondents showed strong agreement that the possibility of earning high salaries was important to the economy as a whole, and to bringing people into professions demanding a lot of preparation. One poll found 63% agreeing that the spending of millionaires gives "employment to a lot of people," with 23% not agreeing, and 68% agreeing that investments help "create jobs and provide prosperity," with 19% disagreeing. A majority agree that no one would go through law or medical school unless they could earn substantially higher incomes than ordinary workers. So concerns about the negative economic effects of curtailing income inequality look to be part of the explanation for the lack of support for redistribution.
On the other hand, the authors found little support for the idea that Americans over-estimate their own standing on the income ladder, and none at all for David Brooks's claims that 19% of Americans believe they are in the top percentile. In one older poll, 20% ranked their families as above or far above average, and 29% as below or far below average; in a newer poll 8% ranked themselves as poor, 19% as lower income, 11% as upper income, and 2% as rich. The halves don't add up, and are skewed to the lower side. The authors note the people tend to be generous in evaluating their abilities, so perhaps there is some over-estimation, but polling evidence suggests otherwise.
The common assumption that people over-estimate upward mobility is complicated by disparate estimations of what it means to be wealthy. One study found that those making $10K a year would require only $50K, while it would take $250K for those making around $75K, so definitions of “rich” probably include moving beyond a hand-to-mouth existence. But the authors suggest that respondents are generally quite reasonable in their expectations about becoming wealthy. Noting that 8% of households make more than $150K a year, and that one analysis of tax returns found a 50% turnover within the top 5% over ten years, the number of people who will be rich at some point is several times larger than the number who are rich at any given time. According to various polls, about 10% of respondents think it is very likely they will be rich, and about 24% that it’s somewhat likely, so they aren’t so far off.
In 2009, one set of pollsters concluded that, "Americans doggedly believe in the rags-to-riches story," but there's a problem with the question on which this conclusion is based: "Do you believe it is still possible to start out poor in this country, work hard, and become rich?" The authors point out that it's certainly possible, so the correct answer in fact is yes; people answering yes may well be acknowledging that possibility, not saying it's highly likely, just as the up to 40% who responded no were more likely commenting on the rareness of the event than the literal impossibility.
Some have suggested that the American public tends to idolize the rich, but this was not supported in polls. First, the majority of respondents indicated they don’t find the rich that interesting, although they like to read about celebrities. A majority of respondents to an AARP poll thought being wealthy was the result of hard work rather than luck, but other polls found that percentages of people who agreed and disagreed that people worked hard for their wealth, and agreed and disagreed that the wealthy had exploited people to get where they were, were about even. Weakleim and Biggert suggest that the number of people who dismiss luck’s importance in becoming wealthy might be unrealistically high because some people may understand “luck” to “mean completely haphazard events, rather than systematic factors such as being born in a wealthy family.”
Although a majority of respondents in one poll believe millionaires give generously to charities, 49% do not believe they feel a responsibility to society because of their wealth, 78% believe them more likely to be snobs, 66% less likely to be honest, and 54% think them more likely to be racists. So, although 61% think the very rich are more likely to be physically attractive, that hasn’t translated to general merit, so admiration for the rich does not rank high as a reason that Mill’s prediction has not come to pass.
And finally the authors take on happiness. Although polls have found that large majorities believe they would be happier if they made more money, and 60% would like to be rich, only about 40% believe they would be happier if they were rich. Fifty-two percent believe the rich are no happier than they are, with only 11% thinking the rich are happier, and 35%, less happy. The authors don’t really see a contradiction here. They note that people might prefer to be rich because it would provide better benefits for their children, or that they would like to be relatively better off than they are, but not necessarily rich. In any case, the authors suggest that people are “resisting the logical consequence of the principle that money makes life better.”
Who knew?
Notes:
Income distribution data available at Emmanuel Saez’s website: http://elsa.berkeley.edu/~saez/
If you would like to see a copy of, “America Looks at the Rich,” please get in touch with us.
Don’t make promises you can’t keep
Taking a page from Charles Kindleberger’s research on the increase in credit’s effect on asset prices, David O. Lucca, Taylor Nadauld, and Karen Shen, researchers at the New York Federal Reserve Bank, have posted a paper putting a price on what increased student loan availability has done to college tuition levels. (Link at foot of article.)
This is a careful paper: the authors lay out concerns about their methodology, stress areas where they see weakness, and balance the whole thing against the benefits to our workers and to our nation of an increase in the share of workers with college degrees. Nonetheless, it is a sobering piece of work that should force a number of deep questions, and, one hopes, policy changes.
In opening the discussion the authors note that much study has been devoted in recent years to the relationship between cheap credit and the 2002-6 housing bubble, and point out that although student loans fund a capital investment, whether delineated broadly as an educated work force, or on an individual level, while mortgages fund an asset, credit is crucial to both, and both enjoy the support of government-sponsored programs.
Federal student aid programs are governed by the 1965 Higher Education Act (HEA), which outlined 6 mandates, the fourth, Title IV, authorizing financial aid to support access to post-secondary education through the Federal Pell Grants program and the Federal Direct Loan Program. The researchers looked at three amendments to HEA: the increase in subsidized loan caps in 2007-8 school year; in unsubsidized caps in the 2008-9 school year, and the gradual increase in Pell Grants between 2207-8 and 2010-11 to link changes in tuition following increases access to loan and grant funding.
Although changes in caps theoretically apply to all institutions, the percentage of students who meet the requirement to gain access to those funds is not evenly distributed, and the students at program caps, say those with funding needs larger than the maximum loans available before cap increases, are the ones most likely to take the loans. As of 2012, about 60% of post-secondary students attended four-year public universities, 29% not-for-private private liberal art colleges and research universities, and 11%, Title IV “less-than-two-year” for-profit outfits, largely vocation and specializing in technology, business, photography, and fashion, including cosmetology and hair styling. That last 11% receives more than 77% of their funding through Title IV, with the largest share of near-the-cap students.
Between 2001 and 2012 yearly student-loan initiations increased from $53 billion to $120 billion, and in recent years 90% of those initiations came through federal student aid programs. Over the same stretch, the average tuition “sticker” price in constant 2012 dollars rose from $6,950 to $10,200, or 46%. (The authors focus on sticker rather than net tuition because it is more readily available, and because of the effects of institutional grants and the like.)
The authors found, not surprisingly, that the institutions with most aid exposure before the cap increases underwent “disproportionate” increases in tuition around those changes. For subsidized loans the authors found that 70 cents of each newly available dollar was captured as a tuition increase, and that approximately 55 cents of each Pell Grant dollar was so captured. Highest pass-throughs took place in the more expensive four-year private institutions with “relatively high-income students but average selectivity.”
Regarding this they conclude:
But it was good for the stock market. On the for-profit front Lucca et al. found evidence of “large abnormal stock market responses for a portfolio of all publicly traded for-profit institutions,” following the passage of the aid increases that summed up to 10% across the segments. They also found that the average increase in the sticker price in these outfits averaged $180, but averaged $56 in the not-for-profit colleges and universities.
Here’s some food for thought via a severe example of tax dollars gone astray. Surely some of the for-profit outfits meet their stated goals, but Corinthian Colleges Inc. (CCI), the largest such for-profit network, was not among them. In April 2015, under Federal criminal investigation, Corinthian closed down its operations, and filed for bankruptcy in May. Charges include misleading students on their career options and Corinthian’s ability to place them following graduation, the graduation rates themselves, and loan issues. California Attorney General alleges CCI targeted single parents close to the poverty level via aggressive marketing. So that’s one place our tax dollars earmarked to increase access to post-secondary education have been. Note to for-profit educators: Don’t make promises you can’t keep.
But we can end on an encouraging note. As is often the case, the action is at the margin. In working to ascertain whether student debt expansion increased access to post-secondary education over the short-haul, the NY Fed researchers found that only the availability of Pell grants increases access. These grants go directly to low-income students, who are most likely to be on the enrollment margin. And although they also push up tuition, they do so at a lower rate than the loan-based increases.
If we’re serious about increasing access to college for those who want to attend, we’d be wise to funnel funds into grant programs that advance that goal, and to do so at the expense of outfits like CCI.
Credit Supply and the Rise in College Tuition: Evidence from the Expansion in Federal Student Aid Programs