Half remembered facts lead to a bad analysis

Senior bankers, private equity moguls and hedge fund managers appear cut off from the rest of us. They often pay little or no tax,

Eh?

What is this little or no tax? Is this some distand memory of the hedgie paying less tax than his cleaner? Which is really he pays a lower marginal rate than his cleaner, not less tax?

Romney made a fortune of an estimated $250 million dollars out of financial engineering and private equity, while benefiting from tax breaks, during his business career. He paid a reported 15 per cent tax on his profits – a rate considerably lower than most Americans.

Err, no. He paid and pays the capital gains tax rate on his capital gains. Exactly the same as all other Americans.

Economists say that the super-rich in the United States are now seven times better off than they were 30 years ago. Troublingly, this massive growth of wealth and power has come directly at the expense of ordinary people. Statistics show that the income of the average working male in the United States has flatlined since the 1970s.

Look at that logic. The rich have got richer, the middle have not got richer. So, how is the increase at the top at the expense of the not rich? The only way it could be is if the proceeds of economic growth have been asymmetrically divided. But that\’s not the same as taking stuff off ordinary people, is it?

Further, it\’s not actually true that average male wages have flatlined since the 1970s. It\’s that median household wage incomes have: and that just ain\’t the same thing at all. For households have got smaller (meraning higher incomes per capita) and household compensation has risen strongly. Much of that compensation coming in the form of better health care which, as it is employer provided compensation but not wages does not get included in the wages numbers.

But now we come to a real problem.

Murray exposes how the new United States upper class, which he labels a “cognitive elite”, has developed an hereditary stranglehold over the top professions and management positions. The brightest people tend to marry each other, then ensure that their offspring get to the best schools and universities, with the result that, to quote Murray: “The parents of the upper-middle class now produce a disproportionate number of the smartest children.”

Assortative mating. One of the things that is seriously driving household income inequality is the way in which marriage is increasingly taking place between people with similar education levels, working in similar type jobs. This is a result of the entry of women into the workforce as equals and the subsequent later age of marriage.

Quite simply, time was, marriage came from those around you, the family\’s friends etc. And upon marriage most women became housewives. Now marriage is contracted later, from among those one meets at university or at work. Or in hte social circles associated with work. Graduates thus marry graduates, professionals professionals, non-professionals non-professionals and so on.

Yes, there is an increasing stratification of household incomes, as we get one group over here, of two professional income households and another group over here of two non-professional incomes. Even if one of those incomes might be put on hiatus for some years, or part time. Two 50k plus professional incomes is going to lead to very different household incomes than two 25k median incomes.

Yes, this is a rise in inequality of household incomes. But to stop it you\’ll have to do one of two things. Change who people marry (and good luck with that one). Or return to taxation of households. That is, remove women\’s tax independence. Which should really go down well with the sisters. Not to say, how do you define a household when marriage isn\’t the defining attribute of a household any more?

I say this is a problem: it is if inequality of household income is something you worry about. But I cannot see any solution to this inequality that isn\’t a horrible retrograde step in terms of individual liberty. Men and women should be treated equally by the tax system. Taxed on their incomes/property, not changeably dependent upon who they shag regularly (to the extent that that happens in marriage tee hee). And we certainly don\’t want any system whereby who you can marry (or shag regularly, have children by) is determined in any manner by the State.

So I don\’t think there\’s a solution to that, is there?

8 comments on “Half remembered facts lead to a bad analysis

  1. Completely off topic but I know how much you love Bath, Tim. Perhaps you and your readers would care to see this charming example of a local trader in action – someone names her shop in the comments but I don’t know if it’s right.

    http://youtu.be/7J505dMg_eg

  2. Easy to solve – just stop women going to university again.

    Whether that’s what they want is another matter. But as you always say, economics is about trade-offs, not solutions.

  3. Just to pick one part in isolation: “Troublingly, this massive growth of wealth and power has come directly at the expense of ordinary people.”

    I am reminded of a sentence from a speech Ronald Reagan gave in 1964: “We have so many people who can’t see a fat man standing beside a thin one without coming to the conclusion that the fat man got that way by taking advantage of the thin one. “

  4. Assortative mating. One of the things that is seriously driving household income inequality is the way in which marriage is increasingly taking place between people with similar education levels, working in similar type jobs.

    Hey, I am willing to make the sacrifice. I am happy to marry any Trolly Dolly or TV News reader, within reason, (or indeed several of them) to help stir up the gene pool a little. What is Kelly Brook doing these days?

    Quite simply, time was, marriage came from those around you, the family’s friends etc. And upon marriage most women became housewives. Now marriage is contracted later, from among those one meets at university or at work. Or in hte social circles associated with work.

    So still the people around you then? I mean in the Victorian period, the sons of clergy married the daughters of clergy. Because they were their friends. They did not marry the daughters of grooms. Boffed them perhaps, but they did not marry them. I mean, how many Surgeons were friendly with coal miners 100 years ago?

    Graduates thus marry graduates, professionals professionals, non-professionals non-professionals and so on.

    Which is exactly what has been happening in Britain for the past 2000 years. What monogamy means is that the lower classes no longer marry into the upper classes.

    What has changed is that the Upper Middle classes now exist and membership of that depends on education. What Charles Murray probably thinks is that there was a one-off benefit from Grammar Schools which allowed all the working class people with the genes to allow them to benefit from education to rise into the Upper Middle Classes. Now the lower class is made up of people born too thick to benefit from university while the middle classes, and especially the upper middle classes, are much better genetically. This is also Lee Kwan-yew’s view of Singapore.

    I am not happy with the genetic argument, but I think there may be something to it. I would go for a cultural explanation before a genetic one. But it is not that assortative mating is new. It is not even that the basis of it is all that new. Just more extreme – and the whole population has been winnowed for people who would benefit from education.

  5. From one four letter acronym (SBML) to another, I would go with SMFS’s view. I don’t think the genetic aspect is that strong. It’s more the cultural and environmental aspect that defines whether a child does well out of their education.

    You have thick well off children who do well because of the effort put into their education. Converserly you have bright poor children who don’t do well because the education system is so geared towards the lowest common denominator (in a false drive for equality).

  6. Astonishingly, I find myself in agreement with SMFS. In the days of Jane Austen much effort was expended in ensuring that people married people of equivalent social class (and money). These days it seems people choose other people of equivalent educational level (and money). The effect is pretty much the same.

    And I also agree with Tim, that there isn’t a solution that doesn’t unacceptably compromise individual liberty. Which is why this problem has never been resolved, of course.

  7. SadButMadLad – “It’s more the cultural and environmental aspect that defines whether a child does well out of their education.”

    And the failure of the education system to do anything other than expensive child care makes that even more true. If you don’t teach your children to read, if you don’t provide a book-rich environment, if you don’t talk about world affairs at the dinner table, the schools sure as hell won’t make up the difference.

    “You have thick well off children who do well because of the effort put into their education. Converserly you have bright poor children who don’t do well because the education system is so geared towards the lowest common denominator (in a false drive for equality).”

    I think you used to have bright poor children who did well, and now you don’t. Largely, apart from the failure of the school system, because those people were identified and removed from the lower classes through the Grammar schools way back when. Now they are Upper Middle class and they have Upper Middle class children. The people who did not give a damn about education continue to have children who do not give a damn about education.

    For the dim but rich I think that took at least a generation longer. Up to Thatcher’s years, I think, the dim but nice Upper class were given special protection. They have been falling ever since Maggie did away with much of that. So we have significant Upper class downward mobility since the 1980s.

    The end result is that Britain will be even more rigidly stratified than before.

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