Who Is Rich?

[T]he rich last had this high a share of total income in the 1920s. . . .

One study by University of Chicago academics Steven Kaplan and Joshua Ruah concludes that in 2004 there were more than twice as many such Wall Street professionals in the top 0.5 percent of all earners as there are executives from non-financial companies. "It's hard to escape the notion," Rauh said that the rising share of income going to the very richest is, in part, "a Wall Street, financial industry-based story." The study shows taht the highest-earning hedge fund manager earned double in 2005 what the top earner made in 2003. Also the top 25 hedge fund mnagers earned more in 2004 than the chief executives of all the copmanies in the Standard & Poor's 500-stock index, combined. It also shows profits per eqity partner at the top 100 law firms doubling between 1994 and 2004, to more than $1 million in 2004 dollars.

From the Wall Street Journal, via the print edition of the Rocky Mountain News today.

I have mixed feelings about this news. To the extent that hedge fund managers make their money on the backs of the idle rich, which is to a great extent what they do, it is hard to see deep issues of social justice at play. The hedge fund managers are, in some horribly indirect way, making the economy more efficient by shifting financial resources from unprofitable businesses to profitable ones, to grossly oversimplify. The idle rich contribute far less.

On the other hand, I am inclined to believe that the immense incomes of those in the financial sector are probably largely a result of some sort of market failure. I simply do not see what the financial sector has done in the last couple of decades to make our economic vastly better than it used to be.

I won't pretend to understand precisely the nature of the gouge. But, the top 1% has gone from 8% of the national income to 21%, in rough terms. Where is that coming from? Does this, like a host of other economic indicators that show parallels between the present and the 1920s, like a record low level of private sector unionization, protend a coming collapse on a par with the Great Depression?

I don't think we are heading towards a Great Depression. The financial sector has done a much better job of isolating responsibility for the subprime collapse than it did for the runs on banks prior to the FDIC, for example. But, this doesn't mean that the economy is healthy.