Poor & Rich Symbiosis

A Look at the Global One Percent 

The remarkable similarity in income distribution across countries over the past century means domestic policy has less effect than many believe on who gets what. 

WSJ Opinion, By Allan H. Meltzer, March 9, 2012

While the Occupy Wall Street movement may be waning, the perception of growing income inequality in America is not. For those on the left, the widening gap between the top 1% of earners and the remaining 99% is proof that American capitalism is unjust and should be traded in for an economic model more closely resembling the social democracies of Europe.

But an examination of changes in income distribution over nearly 100 years, not just in the United States but elsewhere in the developed world, does not bear this out. In a 2006 study titled "The Evolution of Top Incomes in an Egalitarian Society," Swedish economists Jesper Roine and Daniel Waldenström compared the income share of the top 1% of earners in seven countries from the early 1900s to 2004. Those countries—the U.S., Sweden, France, Australia, Britain, Canada and the Netherlands—all practice some type of democratic capitalism but also a fair amount of redistribution.

As the nearby chart from the Roine and Waldenström study shows, the share of income for the top 1% in these seven countries generally follows the same trend line. That means domestic policy can't be the principal reason for the current spread between high earners and others. Since the 1980s, that spread has increased in nearly all seven countries. The U.S. and Sweden, countries with very different systems of redistribution, along with the U.K. and Canada show the largest increase in the share of income for the top 1%.

The main reasons for these increases are not hard to find. Adding a few hundred million Chinese and Indians to the world's productive labor force after 1980 slowed the rise in income for workers all over the developed world. That's the most important factor at work. The top 1% gain relatively because they are less affected by the hordes of newly productive workers.

But the top 1% have another advantage. Many of them have unique skills that are difficult to replicate. Our top earners include entrepreneurs, rock stars, professional athletes, surgeons and lawyers. Also included are the managers of large international corporations and, yes, bankers and financiers. (Interestingly, the Occupy movement seldom criticizes athletes or rock stars.)

The most dramatic change shown in the chart is the decline in the top 1% of Swedish earners' share of total income to between 5%-10% in the 1960s from well over 25% in 1903. The Swedish authors explain that drop as mainly due to the decline in real interest rates that lowered incomes of rentiers who depended on interest and dividends. Capitalist development, not income redistribution, brought that change.

Income-redistribution programs that became widespread in the 1960s and 1970s had a much smaller influence than market forces. Between 1960 and 1980, the share going to the top 1% declined, but the decline is modest. The share of the top percentile had been reduced everywhere by 1960. Massive redistributive policies in Sweden did more than elsewhere to lower the top earners' share of total income. Still, the difference in 1980 between Sweden and the U.S. is only about four percentage points. As the chart shows, the top earners in both countries began to increase their share of income in 1980.

The big error made by those on the left is to believe that redistribution permits the 99% or 90% to gain at the expense of top earners. In much current political discussion, this is taken as an unchallenged truth. It should not be. The lasting opportunity for the poor is better jobs produced by investments, many of which are financed by those who earn high incomes. It makes little sense to applaud the contribution to all of us made by the late Steve Jobs while favoring policies that reduce incentives for innovators and investors.

Our system is democratic capitalism. In every national election, the public expresses its preference for taxation and redistribution. It is a democratic choice, not a plot controlled by one's most despised interest group. The much-maligned Congress is unable to pass a budget because it is elected by people who have conflicting ideas about taxes and redistribution. President Obama wants higher tax rates to pay for more redistribution now. The Republicans, recalling Ronald Reagan and Margaret Thatcher and much of the history of democratic capitalist countries, want lower tax rates and less regulation to bring higher growth and to help pay for some of the future health care and pensions promised to an aging population.

Regardless of one's economic philosophy, the public deserves an accurate presentation of the reasons for the change in income distribution. The change is occurring in all the developed countries. The chart shows that policies that redistribute wealth and income have at most a modest effect on income shares. As President John F. Kennedy often said, the better way is "a rising tide that lifts all boats."

Mr. Meltzer, a professor of public policy at the Tepper School, Carnegie Mellon University and a visiting scholar at Stanford University's Hoover Institution, is the author most recently of "Why Capitalism?" just published by Oxford University Press.