Income Inequality Is Real, It's Global, and It's Worst in the U.S. - Matthew O'Brien - Business - The Atlantic

http://www.theatlantic.com/business/archive/2012/03/income-inequality-is-real-its-global-and-its-worst-in-the-us/254248/

Income Inequality Is Real, It's Global, and It's Worst in the U.S.

I know this sounds like blasphemy, but is it possible that America isn't an exceptional nation? Allan Meltzer makes the case that we are not and never have been -- at least when it comes to income inequality. Here's his chart from the Wall Street Journal showing trends in the income share of the top 1% for a handful of developed countries over the past century.

Let's begin with the left of the graph. As you can see, the incomes of the 1% move (roughly) in tandem across national boundaries. Blaming factors like globalization and new technologies for rising inequality may not be sexy, but that doesn't make them any less true. To the chagrin of Newt Gingrich, there's nothing particularly exceptional about America here.

But as your focus moves to right past 1980, the top 1% in Anglophone countries like the United States, Great Britain and Canada began pulling away from their European peers. And America pulled away from everybody else. Something more than just globalization is going on here.

That something is in large part government policy. A common mistake people make when they think about the government's role in inequality is to focus solely on tax rates. Skyrocketing inequality in the United States coincided with an era of tax-cutting for the rich, so intuitively it seems obvious that the mania for slashing top marginal rates was responsible for the rise of the 1%. Intuitive, but wrong. It's actually been a massive increase in pre-tax incomes for the 1% that has driven soaring inequality, not decreasing redistribution. Which brings us to the Reagan-Thatcher model of deregulated -- or in the case of derivatives, unregulated -- markets. It's this laissez-faire approach to financial markets and corporate boardrooms that explains why our rich have made off like bandits.

The proof is in the chart. Notice the conspicuous wiggle in the income share of America's 1% when the 2008 panic hit. And notice the much less pronounced wiggles for the rich in other countries, Sweden excluded. The fact that the richest Americans -- most of whom are either corporate executives or Wall Streeters -- earn more capital gains than others do explains this difference. It also explains why they command such a high income share. Their diet of capital gains super-charges their incomes, at the expense of making those incomes more volatile.

Foreign 1 percenters are certainly not dense. They would be delighted to collect the type of capital gains that their American counterparts do. It's just that the rules in their countries don't allow it. So what makes America so .... exceptional? For one, we have rather dreadful corporate governance rules that make it far too easy for CEOs to trade sinecures on corporate boards for a rubber stamp on compensation. That's why our golden parachutes are much more golden. More crucially, there's our -- hopefully changed -- Wild West approach to financial markets. As you might have heard, this malign neglect of Wall Street let bankers  load up on risk to boost bonuses. This was great for Wall Street in the short-term, but not so great for taxpayers, who ultimately bore the costs.

Inequality is complicated. Among its many dimensions, there's the 1 percent versus the rest of us, college graduates versus high school graduates, and how much these changes are due to government policies versus long-term global trends. What's not complicated, though, is that it's worse here than it is in other advanced economies. The clocks did not stop in 1980.