The Rich Badly Hurt By Economic Cycles

The poverty level in the US has reached its highest level since 1994, and the number of uninsured Americans is at an all-time high. But it is the rich who are most affected by economic cycles.

Research presented at the Brookings Institution shows that the income of the rich has been 2.4 times more cyclical than those of typical Americans.  Prior to the early 1980s, the rich did not have such a severe problem with income cycles.  This includes the 1% of the most wealthy, who make 11 times the average salary.

At the core of the analysis is a very simple set of points:

The fact that the increase in the cyclicality of the top 1% coincides with the increase in the top 1% income share — both starting in the early 1980s — suggests that a common cause underlies both phenomena. We provide further evidence for a link between increased income inequality and increased cyclicality.  For wages and salaries, this change was first documented by Bound and Johnson (1992) and Katz and Murphy (1992). The increase that began in the 1970’s and 1980’s continued through the 1990’s and into the 2000’s, mostly in the top half of the wage distribution income cyclicality at the top by documenting that i) across groups within the top 1%, higher average income is associated with higher income cyclicality in the 1982-2008 period, ii) across decades, the cyclicality of the top 1% increases decade by decade as the top 1% income share increases, and iii) across countries, increases in income cyclicality of the top 1% are highly correlated with increases in top 1% income shares.

In other words, it is hard to be rich because what the people at the top of the economic period make is less steady than the salaries of most people–that is, if they can keep their jobs.

The conclusion of the research by economists Jonathan Parker and Annette Vissing-Jorgensen is:

We propose that the information and communications revolution provides a natural way to think about how technological change may have raised both top-income shares and top-income cyclicality. The change in technology that we suggest — increased scale or increased “superstar”-type production by top earners – generates a simple connection between shares and cyclicality as the earnings of those operating at a larger scale naturally become more sensitive to the business cycle.

The top earners are, of course, “superstars”, at least in terms of wealth creation.

The Brookings research is worthless.  It is unlikely that the rich will find it a useful road map for how to remain rich.  Moreover,  it does not help the average American become wealthier.

It is more likely that well-to-do economists can make money through analysis of the well-to-do. It is gibberish for which they are undoubtedly highly paid.

Douglas A. McIntyre