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Superstars snap up US growth Samuel Brittan Financial Times 10/02/06 In the heyday of debates about capitalism versus socialism, a common tactic was to calculate that if all incomes were equal, most people would gain only a trivial amount more. And that was without taking into account effects on incentives. It was therefore better for the ordinary wage earner to place his hopes on rising productivity than on state redistribution. Where are we now in this debate? Today, the most interesting analysis of income distribution is coming from the US. Many Americans say that the national dream was that each generation would lead a better life than its predecessor; but they are afraid that this will no longer be true of their own children and grandchildren. US left-of-centre journals are full of calculations showing how a middle-income earner would have to work more hours today than five, 10 or even 25 years ago to obtain basic modern necessities. The stock Republican reply has been to point to the increase in productivity and average real income in which the US has outpaced most other leading western countries. But what is true of the average is not necessarily true of the median – the person in the middle. One of the American economists whom I most trust in this dense jungle, Robert J. Gordon, estimates that real median earnings per hour have hardly increased at all in the US – not merely under the wicked George W. Bush administration but over the preceding period, 1966-2001.* The question is: who has benefited from the trend annual increase of around 2 per cent in US output per hour? Prof Gordon shows that there has been little long-term change in labour’s share in US income in the past half century. What, then, was the source of the increased skewness of the income distribution? Prof Gordon is rightly suspicious of the conventional explanation that it has been mostly due to the pressure of skill-based technical change on the least skilled workers – the ratio of median earnings to those in the bottom 10th has hardly changed. He concludes that it was not a rise of profits or other non-labour income that squeezed the middle-ranking US citizen but an increase in the share of the top 10 per cent of wage and salary earners who have captured almost half the total income gains in the past four decades. Within that, there has been a vast increase of the share of the top 1 per cent, who gained more than all of the bottom 50 per cent. What accounted for this polarisation? One element to which Prof Gordon points is the “superstar premium”, that is the technology which has made the output of “superstars” available to everyone. Wide accessibility for athletes, media and film stars has pushed the majority of performers down the income distribution. He replies to the retort that there are not enough celebrities by pointing to the ubiquity of these phenomena in many walks of life outside headline entertainment. He is less sure about the “escalating compensation” of top corporate officers. He does not believe it represents higher returns to human capital. He notes that from 1989 to 1997, compensation of chief executive officers rose by 100 per cent while that of occupations in maths and computer science rose by less than 5 per cent. He has to fall back on “if you scratch my back, I’ll scratch yours” mutual pay determination by “an exclusive class of CEOs”. In any case, we can no longer say with as much confidence as before that redistribution will achieve very little. Tony Blair, UK prime minister, once said that reducing the earnings of soccer star David Beckham was not a priority. But if Beckham’s corporate equivalents now account for a substantial proportion of the national income, the matter looks different. Does that mean another “soak the rich” campaign? One is indeed likely in the US. Republicans will not be able for ever to divert attention to religious and “moral” issues. But it is still unwise to push top marginal tax rates on income too high. Prof Gordon reminds us that there are extremely long cycles in income distribution, which was indeed just as much flattened in the half century to 1970 as it widened in more recent decades. Nevertheless, the Republicans would be wise not to tempt fate by insisting on making permanent the tax cuts at the top of the scale, and the Democrats would be well advised to look carefully at forms of redistribution that do not inhibit economic performance, as the top marginal income tax rates of above 90 per cent that the British had before 1979 did. Land and wealth taxes and more shareholder activism are a much better bet. US reformers cannot be fobbed off by saying that redistribution would drive away the best people to the US – they are already there! One day, competition from China and India will deal with bloated top salaries. But not yet. *Where did the Productivity Growth go? I.Dew-Becker and R.J.Gordon, Centre for Economic Policy Research
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