inconvenient truth: reviled 1 percent are not all wicked

It is amazing how the “one percent” epithet, a reference to the top 1 percent of earners, has caught on in the developed world.

In the United States, this 1 percent includes all those with a 2006 household income of at least US$386,000. In the popular narrative, the 1 percent is thickly populated with unscrupulous corporate titans, greedy bankers, and insider-trading hedge-fund managers.

Reading some progressive economists, it might seem that the answer to all of America’s current problems is to tax the 1 percent and redistribute to everyone else.

Of course, underlying this narrative is the view that this income is ill-gotten, made possible by Bush-era tax cuts, the broken corporate governance system, and the conflict-of-interest-ridden financial system. The 1 percent are not people who have earned money the hard way by making real things, so there is no harm in taking it away from them.

Clearly, this caricature is based on some truth. For instance, corporations, especially in the financial sector, reward too many executives richly despite mediocre performance. But apart from tarring too many with the same brush, there is something deeply troubling about this narrative’s reductionism.

It ignores, for example, the fact that many of the truly rich are entrepreneurs. It likewise ignores the fact that many of the wealthy are sports stars and entertainers, and that their ranks include professionals such as doctors, lawyers, consultants, and even some of our favorite progressive economists. In other words, the rich today are more likely to be working than idle.

But what might be the most important overlooked fact is that the rise in incomeinequality is not just at the very top, though it is most pronounced there. Academicstudies suggest that the top tenth percentile of income distribution in the US, andelsewhere, is also moving farther away from the median earner.

This is an inconvenient fact for the progressive economist. “We are the 90 percent,”sounds less dramatic than “we are the 99 percent.”

Education matters

And, for some of the protesters, it may not even be true. Perhaps most problematic,though, is that something other than plutocrat-friendly policies is largely responsible forthe growing inequality. That something is education and skills.

True, not every degree is a passport to a job. Freshly minted degree holders,especially from lower-quality programs, are finding it particularly hard to get a jobnowadays, because they are competing with experienced workers who are alsojobless. Nevertheless, the unemployment rate for those with degrees is one-third theunemployment rate for those without a high school diploma.

Close examination suggests that the single biggest difference between those at orabove the top tenth percentile of the income distribution and those below the 50thpercentile is that the former have a degree or two while the latter, typically, do not.

Technological change and global competition have made it impossible for Americanworkers to get good jobs without strong skills. As Harvard professors Claudia Goldenand Larry Katz put it, in the race between technology and education, education isfalling behind.