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When people talk about wealth inequality, you usually hear some statistic about how much the top 20%, 10%, or even 1% of Americans earn.
What rarely gets discussed is the top 0.00013% -- the 400 richest Americans.
The IRS releases data every year (albeit with a three-year lag) on how much income was earned by the top 400 taxpayers.
Four hundred people. Just enough folks to fit in an average apartment building. Or a 747, with room to spare. Not a lot of people. Barely enough to even call a group on a national scale.
Their share of total national income, however, might surprise you.
It bears clarifying that this chart doesn't show income growth. It's growth in 400 people's share of all income earned by the entire U.S. economy.
A few details:
- The 400 top taxpayers' total income as a share of all national income has tripled, from 0.52% in 1992 to 1.59% in 2007.
- Their share of interest income more than quadrupled, from 0.85% in 1992 to 4.04% in 2007. Dividends weren't close behind, rising from 1.4% to 4.14%.
- Capital gains saw the smallest increase in share growth, merely doubling from 5.71% to 10.07%. Still, think about that. Four hundred people earn 10% of all capital gains.
- The share of wages actually fell from 0.17% to 0.15%. Why? Income increasingly came from dividends and interest.
- In dollar terms, average income increased from $46.8 million in 1992 to $344.8 million in 2007, or from about a million a week to about a million a day.
- If you look at the period from 2000-2007, total income of the 400 richest Americans increased by $68 billion, while GDP of the entire economy increased by $4 trillion. Almost 2% of all the economic growth during that period, then, went to just 400 people.
And tax rates? Big drop:
I don't think you can look at any of this and conclude either bad or good. There are elements of both.
In one sense, it's natural for the most productive members of society to grow faster than the broader average. And the most important part of capitalism is that productivity is rewarded. The fact that some found an opportunity to make an ungodly amount of money underlines a fundamental advantage of the U.S. economy.
The question is whether wealth creation, particularly over the past several decades, has been fully meritocratic. In general, it is. Yet measures of income mobility -- the ability to earn your way from poor to rich -- rank the U.S. near the bottom among developed nations. In the U.S., nearly 50% of someone's earnings can be explained by his or her fathers' income, compared with less than 20% in Canada, Finland, Norway, Australia, and Denmark.
Since 1992, the average tax rate has gone down for all Americans, from 9.9% to 9.3%. But the drop for the top 400 has been far greater, with average rates falling by nearly half. This might tell us something about political influence and the budget deficit, but it doesn't provide insight into wealth inequality. Income measured in the first chart is, after all, pre-tax.
So what has changed over the past few decades that caused such a great shift? Two things stick out to me.
The first is the surge of the financial sector. As a share of gross domestic product, finance and insurance grew by a third over the past two decades, from 6% in the early '90s to over 8% today. Some of this was the growth of megabanks like Citigroup (NYSE: C ) and Bank of America (NYSE: BAC ) , but the real growth came in areas like hedge funds and private equity, where compensation is utterly ridiculous. The top 25 hedge funds managers earned a combined $25.33 billion in 2009 -- more than $1 billion each. And that wasn't an anomaly by recent standards. This type of pay has simply never occurred in non-financial industries, even (or especially) ones most of us would consider more important and innovative. As Warren Buffett remarked earlier this year, financiers "don't work that much harder and aren't much brighter than someone building a dam and a whole lot of other talents." He continued, "Market systems produce strange results. Wall Street markets are so big, there's so much money, that taking a small percentage results in a huge amount of money per capita in terms of the people that work in it. And they're not inclined to give it up."
To a lesser extent, though still important, is a general explosion in executive compensation. Average CEO compensation has increased from 42 times the average workers' pay in 1980 to more than 300 times in recent years.
Some say this is simply due to market forces. Shareholders pay top dollar for top executives. But at least among public companies, shareholders' willingness to exercise their voting rights is abysmal. As Benjamin Graham wrote in 1949, shareholders, "show neither intelligence nor alertness ... and vote in sheeplike fashion for whatever the management recommends no matter how poor the management's record of accomplishment may be." That's still as true today, if not more so. More specifically, executive pay is prone to a ratcheting effect where a CEO's compensation isn't based on internal metrics, but simply what other CEOs made. If one CEO gets a $20 million bonus, the CEO of a rival firm now deserves one. If one gets a private jet, they all need private jets. That's the nature of competition, but shareholders' silence and passivity has removed the checks-and-balances forces that, in a real marketplace, would keep compensation in check with reality. Rather than a market, it's become an arms race.
What do you think about the earnings of the top 400 Americans? Sound off in the comment section below.
Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.