The student debt crisis in one chart

Posted by  at 10:35 AM ET, 10/19/2011
The household credit market is slowly recovering: consumers are generally getting better at meeting their debt payments on time, becoming more willing to borrow, while banks are more willing to lend them money, according to the latest data from the Federal Reserve Bank of New York. But there are some big exceptions to this trend. Americans have become seriously delinquent on an increasing percentage of their student loan debt. In fact, as USA Today notes*, outstanding student loans on track to hit a record high of more than $1 trillion this year, and “Americans now owe more on student loans than on credit cards,” according to the new data. [Contra USA Today , student loan debt is at $550 billion, and it’s still below credit-card debt, which is at $690 billion, according to the New York Fed figures. See update below.]Since the peak of the crisis in 2009, they’ve become increasingly able to pay off their credit cards and mortgages. But the student loan debt crisis has continued mostly unabated.
(New York Fed)Update: An earlier version of this post said that student loan debt has already hit $1 trillion. It’s projected to hit that figure this year.Update 2: Felix Salmon doubts USA Today’s conclusion that there’s projected to be $1 trillion in student loan debt this year. His own conclusion from the Fed data is that there’s $550 billion in student-loan debt—nowhere close to $1 trillion and still less than the $690 billion in credit card debt. I’ve checked the figures that Salmon references, and he’s correct. But other data outside the Fed confirm the $1 trillion figure ad student loans outpacing credit cards.

We Are the 99.9%

Published: November 24, 2011
Fred R. Conrad/The New York Times

Paul Krugman

“We are the 99 percent” is a great slogan. It correctly defines the issue as being the middle class versus the elite (as opposed to the middle class versus the poor). And it also gets past the common but wrong establishment notion that rising inequality is mainly about the well educated doing better than the less educated; the big winners in this new Gilded Age have been a handful of very wealthy people, not college graduates in general.

If anything, however, the 99 percent slogan aims too low. A large fraction of the top 1 percent’s gains have actually gone to an even smaller group, the top 0.1 percent — the richest one-thousandth of the population.

And while Democrats, by and large, want that super-elite to make at least some contribution to long-term deficit reduction, Republicans want to cut the super-elite’s taxes even as they slash Social Security, Medicare and Medicaid in the name of fiscal discipline.

Before I get to those policy disputes, here are a few numbers.

The recent Congressional Budget Office report on inequality didn’t look inside the top 1 percent, but an earlier report, which only went up to 2005, did. According to that report, between 1979 and 2005 the inflation-adjusted, after-tax income of Americans in the middle of the income distribution rose 21 percent. The equivalent number for the richest 0.1 percent rose 400 percent.

For the most part, these huge gains reflected a dramatic rise in the super-elite’s share of pretax income. But there were also large tax cuts favoring the wealthy. In particular, taxes on capital gains are much lower than they were in 1979 — and the richest one-thousandth of Americans account for half of all income from capital gains.

Given this history, why do Republicans advocate further tax cuts for the very rich even as they warn about deficits and demand drastic cuts in social insurance programs?

Well, aside from shouts of “class warfare!” whenever such questions are raised, the usual answer is that the super-elite are “job creators” — that is, that they make a special contribution to the economy. So what you need to know is that this is bad economics. In fact, it would be bad economics even if America had the idealized, perfect market economy of conservative fantasies.

After all, in an idealized market economy each worker would be paid exactly what he or she contributes to the economy by choosing to work, no more and no less. And this would be equally true for workers making $30,000 a year and executives making $30 million a year. There would be no reason to consider the contributions of the $30 million folks as deserving of special treatment.

But, you say, the rich pay taxes! Indeed, they do. And they could — and should, from the point of view of the 99.9 percent — be paying substantially more in taxes, not offered even more tax breaks, despite the alleged budget crisis, because of the wonderful things they supposedly do.

Still, don’t some of the very rich get that way by producing innovations that are worth far more to the world than the income they receive? Sure, but if you look at who really makes up the 0.1 percent, it’s hard to avoid the conclusion that, by and large, the members of the super-elite are overpaid, not underpaid, for what they do.

For who are the 0.1 percent? Very few of them are Steve Jobs-type innovators; most of them are corporate bigwigs and financial wheeler-dealers. One recent analysis found that 43 percent of the super-elite are executives at nonfinancial companies, 18 percent are in finance and another 12 percent are lawyers or in real estate. And these are not, to put it mildly, professions in which there is a clear relationship between someone’s income and his economic contribution.

Executive pay, which has skyrocketed over the past generation, is famously set by boards of directors appointed by the very people whose pay they determine; poorly performing C.E.O.’s still get lavish paychecks, and even failed and fired executives often receive millions as they go out the door.

Meanwhile, the economic crisis showed that much of the apparent value created by modern finance was a mirage. As the Bank of England’s director for financial stability recently put it, seemingly high returns before the crisis simply reflected increased risk-taking — risk that was mostly borne not by the wheeler-dealers themselves but either by naïve investors or by taxpayers, who ended up holding the bag when it all went wrong. And as he waspishly noted, “If risk-making were a value-adding activity, Russian roulette players would contribute disproportionately to global welfare.”

So should the 99.9 percent hate the 0.1 percent? No, not at all. But they should ignore all the propaganda about “job creators” and demand that the super-elite pay substantially more in taxes.


NOVEMBER 20, 2011

Robin Wells: We Are Greg Mankiw… or Not?

In response to the walkout staged by students in the intro economics class at Harvard, INET launched the syllabus project 30 Ways to Teach Economics. We invited professors and students to send us syllabi, and to share their experience with teaching and learning intro economics. Here are three responses, from Bruce Caldwell, Duncan Foley, and Stephen Ziliak.

Another response comes from Robin Wells. In this essay, she warns teachers of letting the classroom become disconnected from the real world. Amid mass unemployment and economic turmoil, “instructors who lecture on the superiority of free markets without acknowledging the dysfunction in the wider economy are at risk of appearing out of touch and exacerbating antipathy towards economics.”

Wells has taught economics at Princeton University and Stanford Business School. With Paul Krugman she co-authored Economics, published by Worth Publishers and soon forthcoming in the 3rd edition.

We Are Greg Mankiw… or Not?


On Nov. 2nd, a group of students in Harvard University Ec10, the introductory economics class taught by Greg Mankiw, staged a walk-out. In an open letter, the students lambasted Greg’s course and his textbook for “espous[ing] a specific – and limited – view of economics that we believe perpetuates problematic and inefficient systems of economic inequality in our society today…..There is no justification for presenting Adam Smith’s economic theories as more fundamental or basic than, for example, Keynesian theory.”

I am sure that many of us who have taught introductory economics or who have written an intro economics textbook (a much smaller subset, and I fall into both) felt a pang of sympathy for Greg when we heard about the walk-out.  If you have ever faced a large lecture hall of restive intro econ students, or coped with a voluble student with an ax to grind, you can feel some solidarity: we are Greg Mankiw too.

But just how far should that sympathy extend?  Is Mankiw simply the target of fuzzy-minded youth who are more intent on making a statement than engaging in reasoned inquiry? Or, is Mankiw – and much of the profession, for that matter – getting a needed reality check about the need to re-orient the way we teach economics?

First, let me say what this essay is not.  It is not an attempt to promote my textbook over Mankiw’s nor an exercise in partisan jousting.  I don’t find a walk-out a useful way to communicate displeasure with an instructor – better to invite him or her to a friendly debate with opposing views. This essay is not a critique of Mankiw’s teaching approach: I was not there to witness it, and every instructor will differ in political preferences and emphasis.  And neither will this essay advocate a root-and-branch re-think of how to teach introductory economics for both pedagogical and practical reasons.  I consider standard microeconomics to be an invaluable introduction to how to reason about the allocation of scarce resources.  Moreover, most intro econ instructors are stretched far too thin to contemplate a wholesale revision of their courses.

But what I will say is this: something is shifting out there, and we ignore it at our peril. It would be very easy to dismiss the student walk-out as an exercise in intellectual laziness and grandstanding.  (After all, as many have pointed out, Keynesian models can’t be taught until second semester of Harvard Ec10.)  But perceptive instructors know that sometimes a stupid question is more than a stupid question.  And a really perceptive instructor will take a seemingly stupid question and turn it into the insightful question that the student should have asked.

Right now the general public views the economics profession with a large measure of distrust and in some cases outright contempt. Students are entering the worst job market in well over a generation, without much prospect of improvement.  Many of them have seen their parents’ lives turned upside down by financial troubles.  They face being members of the first generation in American history with a lower standard of living than their parents.  Income inequality has reached levels not seen since the Gilded Age.  There are over 4 million long-term unemployed.

In this environment, instructors who lecture on the superiority of free markets without acknowledging the dysfunction in the wider economy are at risk of appearing out of touch and exacerbating antipathy towards economics.

But how does an instructor do this in an introductory economics?  I think it’s largely a matter of shifting our perspective to let go of the certainties that were part of our economic training and admit to the painful economic uncertainties that many Americans now inhabit.  Here are four ways to help bring that shift to the classroom:

Provide Context.   Compared to past years, instructors need to acknowledge the limits of free markets earlier in their courses. Students should understand the difference between the conceptual importance of free markets and their real world limitations. Explain that much of the current economic distress arises from markets that don’t behave competitively — the labor and financial markets.

Build Trust.  Trust is built when the instructor compensates for the one-sided nature of the relationship by treating students’ viewpoints with respect.  And this is where the art of the perceptive instructor is most likely to be needed.  For example, to the microeconomics student who protests that Keynes and Adam Smith should be given equal time, respond that the issue boils down to why some economists believe that the labor market doesn’t always clear while others believe that its does.  Then take a few minutes to discuss each side of the debate.   Yet, also make clear that valuable class time won’t be wasted on debating viewpoints that are contradicted by the data.

Address Distributional Issues.  The dramatic rise in U.S. income inequality compels us as instructors to address it.  While international trade and educational differences have clearly contributed to some of the rise, it’s clear that they are only partial explanations: they can’t explain the explosion of income gain at the top 1% of the income distribution, and particularly at the top 0.1%.  We shouldn’t extol the benefits of markets while ignoring today’s highly skewed distribution of the benefits.  While there is no single definitive explanation, there are many factors that are feasible topics in class: moral hazard and the setting of CEO compensation, the decline of countervailing forces such as unions and higher marginal tax rates at the top end, deregulation, asset bubbles and the financialization of the U.S. economy.  And then discuss: to what extent is the level of income inequality a legitimate policy target?

Finally, Adopt Some Humility.  It’s true that those of us who weren’t in the business of teaching Gaussian pricing formulas for CDO’s or touting the benefits of homeownership via sub-prime mortgages aren’t directly responsible for the economic mess we’re in.  But in the eyes of many students we are culpable to the extent that we dismiss the need for some re-think of the deference accorded to free markets in how we teach economics as applied to the real world.  Again, I want to emphasize that we make the distinction between communicating the importance of free markets as an intellectual building block and the frequent mis-use of free market concepts when it comes to making real world policy choices.  Lastly, in a world of liquidity-trap macroeconomics, soaring income inequality and an exploding Eurozone, we are going to have to admit that there are areas in which the profession just doesn’t know what the right answer is.

And remember, there is such a thing as a first-mover advantage.  So schedule a teach-in before your classroom is occupied.

Posted by The Institute for… at 6:34 pm



NOVEMBER 18, 2011

Professors share their experience with teaching intro economics

In response to the walkout staged by students in the intro economics class at Harvard, INET launched the syllabus project 30 Ways to Teach Economics. We invited professors and students to send us syllabi, and share their experience with teaching and learning intro economics. Here, you can read about three different courses. Find more syllabi here.

Macroeconomics without the AS-AD model

Duncan Foley, Leo Model Professor of Economics at the New School for Social Research, tells us that he stays away from the AS-AD model, which is present in nearly every textbook. He sends us the syllabus to Principles of Macroeconomics and writes:

The syllabus deviates from the standard Introduction to Macroeconomics course primarily in framing the issues in terms of economic history and the history of economic thought, and emphasizing institutions complementary to theories. I personally find the widely-adopted “AD-AS” framework for teaching macroeconomics intellectually fallacious and ideologically loaded, so I try to stay away from it.

Microeconomics with Mankiw’s textbook

Bruce Caldwell, Research Professor of Economics and the Director of the Center for the History of Political Economy at Duke University, uses Greg Mankiw’s textbook for introductory micro. He sends us the syllabus to Principles of Microeconomics and writes:

I used Mankiw for my introductory microeconomics text when I taught large enrollment courses at UNC-Greensboro a few years back. The text develops in a clear manner the basic tools of microeconomics: production possibilities curves, supply and demand curves, the notion of elasticity, the various diagrams associated with market structures.  It is very difficult to get people to read much in large classes, and many UNCG students are first generation college students who in addition to carrying a full load work 25+ hours a week at jobs. But if they did the minimal reading I assigned for class they would have the basics under their belts and would be able to understand my lectures.

For lectures I would go through the basics then illustrate them with case studies or applications. I would pitch the lectures at a higher level. I would also give occasional homeworks, uncollected and ungraded, that I would go over in class. Those who did them typically would do well in class. The others, not so well.

Part of what the class was about was to teach students to take responsibility for their education. On the first day I would go over study tips that, if they followed them, would enable them to succeed. The first was to come to class. Next was to review notes from the past week (I told them to recopy them) each weekend. This helps to cement the concepts in their minds, allows them to see if there are any gaps or areas where they are confused, and if so, to come to see me. Third was to quit their job and sell their car (or if this was not possible, to take fewer classes).  A portion of students would not come to class (I did not take attendance – coming to class was up to them), would not do the reading, would not follow the study tips. They would not do well on the first test: typically about half of the class would get an F or D. When I went over the test I would tell them that if they were unsatisfied with their grades they should either change their behavior (by following the study tips) or drop the class. Note that the test option I provided was to replace the lowest test grade with whatever one gets on the final, so a change in behavior could lead to a much better grade.  Some would change and improve, others would drop the class. Sadly, a certain portion would not change their behavior or drop the class. Hope springs eternal, I suppose.

Microeconomics using “The Grapes of Wrath”

Stephen Ziliak, Trustee and Professor of Economics at Roosevelt University-Chicago and a member of the INET Curriculum Committee Task Force, teaches introductory microeconomics using The Grapes of Wrath (1939). Here is the syllabus.

The Grapes of Wrath was published by its author, John Steinbeck, in 1939, during the worst economic crisis in American and world history. Set in and written during the Great Depression, The Grapes of Wrath is a bluesy road-novel with a lot of social and economic theory and analysis. It follows a family of homeless and landless tenant farmers from Oklahoma—the Joads—who’ve been forced on account of foreclosure to leave the farm and land which they labored and lived on for several generations.

Forced by a large bank and absentee owners to leave their home, the Midwestern farmers with little education and no income join other displaced workers on the road to California, in search of jobs, food, and housing—a piece of the American Dream.

Steinbeck’s Pulitzer Prize-winning novel was for many years censored and banned by governments and school boards made uncomfortable by the novel’s detailed portrayal of economic inequality, hardship, and oppression.

We asked Stephen Ziliak to share his experience teaching The Grapes of Wrath, which he has used since 1996 to form the basis of his intro economics course.

Q: Why, Professor Ziliak, way back in 1996, did you begin to teach to introductory economics students The Grapes of Wrath?

A: I guess my first response is that I eschewed in my own research the one-voiced, monological approach of conventional neoclassical economics. Trained as an economic historian, I’m an amateur poet who had also worked as a welfare and food stamp caseworker in the county welfare department, going door-to-door in the poorest neighborhoods of Indianapolis. When I became an Assistant Professor of Economics, in 1996, I was searching for a teaching method that would open up the conversation to a wider, more realistic set of issues. It only seemed fair to me: given that I myself had philosophical objections to the conventional approach to teaching utilitarian economics, it hardly seemed right to force-feed my students. Plus, many of my students came from working class families but they’d never experienced a recession. I wanted them to know that growth and bubbles do not last forever.

Q: Why teach The Grapes of Wrath and not some other novel?

A: Good question. First and foremost, it’s an incredibly moving novel that—I openly admit—continues to make me laugh and cry. Now laughing and crying are not necessary for good pedagogy. But it seems to me that if a fact-based story about economic history can make a grown man and professor of economics cry, it must have something important to say. The visible hand of class conflict needs to be aired and this novel does it.

Q: You said fact-based. What do you mean—it’s a novel, it’s fiction, yes?

A: Yes, but it’s historical fiction—meaning that Steinbeck, like Hugo, Zola, and others before him, was deliberately depicting real and felt experiences. There are exaggerations and omissions of fact, true—as economic historians and English professors know full well. But in fact, Steinbeck himself spent a year or more working and studying inside of the same temporary labor camps that the fictional Joad family experienced in California.

Q: How do students react? Can you share some insights from the teacher perspective?

A: Really well, eventually. Some are defensive at first, being trained to believe that stories are for novelists and theory for scientists. Still others have been so deeply entrenched with what I call the banking approach to learning—regurgitating facts and equations—they’re afraid of dialogue and a plurality of voices and interpretation. But students tell me it’s one of those life-changing courses.

Q: What about the “quants”? Do quants survive the course?

A: Again, it’s not for everyone. But yes, absolutely. An example is a student who studied with me at Roosevelt University. He came to Roosevelt as a freshman from Puerto Rico on a violin scholarship. He was preparing for a career in violin at our conservatory and, at the same time, he had a passion for advanced mathematics. On a lark he enrolled in my Grapes of Wrath course. Half-way through the term he told me that something was happening to him. The evolution of the protagonist, Tom Joad, from self-interested ex-con to benevolent labor leader, he found fascinating. He thought that he might have to switch from violin and math to economics. I told him no, if he really wanted to switch he could study math and economics—he wouldn’t have to give up the math. By the time he was a junior (a third year student) he landed a job with the Federal Reserve Bank of Chicago. At graduation he was promoted to Associate Research Economist. Now he’s a master’s student in economics and statistics at Duke University but he is not at all bamboozled by the utility maximization-only school.

Q: Do you supplement the novel with other literature or media?

A: Yeah. For example, a particularly fun day of class is when we play music by Woody Guthrie, Bruce Springsteen, and Rage Against the Machine—who’ve recorded songs about Tom Joad. Springsteen himself recorded an entire CD on the central themes.

Here’s the story in the Harvard Crimson:

Students Walk Out of Ec 10 in Solidarity with ‘Occupy’

Published: Wednesday, November 02, 2011
Economics 10 WalkoutHarvard students and community members gather in front of John Harvard statue in solidarity with the Occupy Movement and Occupy Oakland.

UPDATE: 4:04 a.m. November 3, 2011

Nearly 70 Harvard student protesters walked out of Economics 10 on Wednesday afternoon, expressing dissatisfaction with what they perceive to be an overly conservative bias in the course.

The walkout was meant to be a show of support for the “Occupy” movement’s principal criticism that conservative economic policies have increased income inequality in the United States.

“Today, we are walking out of your class, Economics 10, in order to express our discontent with the bias inherent in this introductory economics course. We are deeply concerned about the way that this bias affects students, the University, and our greater society,” read a statement issued by the organizers.

Economics 10—more commonly referred to as “Ec 10”—is taught by professor N. Gregory Mankiw, and has the highest enrollment of any course at the College, boasting over 700 enrollees.

“I was going to announce this at the end, but I have a feeling people might leave a little early,” he said.

At 12:15 p.m. students stood up en masse and walked out of Sanders Theatre, where Ec 10 lectures are held. Some students carried signs, but most left carrying just their backpacks. As the demonstrators marched out of Sanders Theatre, a small crowd booed them in support of Mankiw. Most students remained in their seats

After walking out, the group gathered in the hallway outside of the theater, standing in a circle and speaking out about the event.

“Harvard graduates have been complicit [and] have aided many of the worst injustices of recent years. Today we fight that history,” said Rachel J. Sandalow-Ash ’15, one of the students who organized the walkout. “Harvard students will not do that anymore. We will use our education for good, and not for personal gain at the expense of millions.”

Gabriel H. Bayard ’15, another organizer of the walk out, said that he believes the course is emblematic of the economic policies that have led the financial crisis.

“Ec 10 is a symbol of the larger economic ideology that created the 2008 collapse. Professor Mankiw worked in the Bush administration, and he clearly has a conservative ideology,” Bayard said. “His conservative views are the kind that created the collapse of 2008. This easy money focus on enriching the wealthiest Americans—he really operates with that ideology.”

Mankiw served as the chairman of the Council of Economic Advisers during the second Bush Administration and is currently an adviser to former Mass. Governor Mitt Romney’s presidential campaign. Mankiw declined to comment for this article.

Sandalow-Ash ’15 said that the course too heavily asserts conservative economic claims as fact.

“It’s a class that’s very indoctrinating, and does not encourage diversity of views. Economic questions are not always clear-cut. Multiple views should be presented in this course,” Sandalow-Ash said.

Many undergraduates remained skeptical of the demonstration’s mission.

Mark S. Krass ’14 said he believes the walkout’s intended goals were unclear, which detracted from the walkout’s message and comprises its integrity.

“Those of us who are supportive of Occupy Wall Street are trying very hard to combat the view that there is no set of objectives or ideology motivating that movement,” Krass said. “It was really distressing for people to advertise a walkout of Ec 10 on the basis of high textbook prices and bad teaching.”

Jeremy Patashnik ’12, an economics concentrator who authored a lengthy piece in defense of the course for the Harvard Political Review, rejected the notion that Ec 10 carries a conservative bias.

“I self-identify as a liberal on these issues, and I don’t see the conservative bias. I think this walkout misses the point of what Ec 10 is supposed to be,” Patashnik said. “This class is not attempting to give normative answers about how to address social issues. It’s meant to introduce students to economics as a social science.”

Krass noted that the topic of Wednesday’s lecture—income inequality—might have been particularly interesting to those who participated in the walkout.

“It’s incredible that in the name of advancing a more liberal view of economics they chose to walk out of a class on a social issue they care about,” Krass said.

According to those who walked out, part of the discontent with Economics 10 stems from what they say is the limited number of opportunities to express skepticism toward the material taught in the course.

“I’ve definitely written question marks in my textbook, but we never really get to question [what he says] in section,” said Alexandra E. Foote ’15, who is currently enrolled in the course. “I don’t know very much about economics, and it’s not really fair that I’m getting a skewed perspective.”

—Staff writer Jose A. DelReal can be reached at

The Open Letter the students sent to Mankiw:


A student defends the course:


The Harvard Crimson has an editorial on the protest:

NPR interviews Mankiw.

The EPI ( is celebrating its 25th anniversary. This is a recent report on the growing social inequality that underlies the ongoing protests in the country against Wall Street.

REPORTOccupy Wall Street

Occupy Wall Streeters are right about skewed economic rewards in the United States

By Josh Bivens and Lawrence Mishel | October 26, 2011

The Occupy Wall Street movement has captured much the nation’s attention with a clear message: A U.S. economy driven by the interests of business and the wealthy has generated increasingly unequal economic outcomes where the top 1 percent did exceptionally well but the vast majority did not do well at all.

According to the data, they’re fundamentally right. This paper presents 12 figures that demonstrate how skewed economic rewards (in income, wages, capital income, and wealth) have become in the United States. These figures, most of which cover 1979 through 2007 (prior to the recession) generally break out trends for the top 1 percent, the next richest 9 percent, and then the bottom 90 percent of households or earners. While income growth at the very top—the richest 1 percent and above—has been truly staggering, incomes at roughly the 90th percentile and above (the richest 10 percent) have generally at least matched the rate of economy-wide productivity. It is below the 90th percentile where one really sees the potential fruits of economic growth (as measured by economy-wide productivity) failing to reach American households. An economy that fails to cut in 90 percent of American households on a fair share of economic growth is one that needs serious reform. As the figures show:

  • The top 1 percent of households have secured a very large share of all of the gains in income—59.9 percent of the gains from 1979–2007, while the top 0.1 percent seized an even more disproportionate share—36 percent. In comparison, only 8.6 percent of income gains have gone to the bottom 90 percent. The patterns are similar for wages and capital income.
  • As they have accrued a large share of income gains, the incomes of the top 1 percent of households have pulled far away from the incomes of typical Americans. In 2007, average annual incomes of the top 1 percent of households were 42 times greater than incomes of the bottom 90 percent (up from 14 times greater in 1979) and incomes of the top 0.1 percent were 220 times greater (up from 47 times greater in 1979).
  • The financial sector’s share of the overall economy has roughly doubled in recent decades, and now stands at 7.6 percent of total national income. Relative to this sector’s share in 1979, this translates into an extra $547 billion in compensation and profits claimed by the sector—a trend with questionable social payoff.
  • Growth in wealth, not just incomes, has also become greatly skewed in recent decades. Most of the wealth gains of the last generation went to those who already had the most wealth, a group increasingly distant from the vast American middle-class. The wealth of the median household actually declined over this time period. As a result, in 2009, wealth held by the wealthiest 1 percent of households was 225 times greater than that held by the median household.

The effect of policy on income and wealth inequality

No one who has looked at trends in economic inequality in the United States in recent decades could dispute the dramatic increase in the share of all income claimed by the richest subgroups—especially the highest-earning 1 percent referred to by Occupy Wall Street activists when they say they represent the 99 percent of Americans left behind. Mishel, Bernstein, and Shierholz (2009) present a comprehensive review of these trends and Piketty and Saez (2010, updating earlier reports) explore in more depth the gains enjoyed by the top 1 percent.

There is some disagreement around the edges of the debate concerning just how dramatic this income-share increase was or when exactly it happened—was it steady and continuous, or the result of a couple of discrete “jumps”? And there are those who discount the seriousness of the divide, saying that middle-class incomes are managing to grow despite the huge increase in the top earners’ share. But no serious analyst denies that the top 1 percent (of households or tax-units or families) has seen a very large increase in incomes and in share of total income since the late 1970s.

Public policy, either through commission or omission, has played a central role in the increasing concentration of income. For example, Baker (2006), Bivens (2010), and Hacker and Pierson (2010) have all documented the role of various policies in generating greater inequality. The decade-long surge in income inequality occurred in pre-tax incomes, driven by developments in both major kinds of market-based incomes, namely the wage and salary incomes from work, and capital incomes (realized capital gains, interest, dividends) from wealth. And we know that the most obvious way policy can affect incomes—through taxes—has clearly aided the widening of the income gap. The Congressional Budget Office (CBO) shows that even as their share of total incomes more than doubled between 1979 and 2007, the richest 1 percent of household’s effective federal tax rate fell from 37 percent to 29.5 percent.

The clear policy tilt in favor of the highest-income households in the completely visible realm of taxes suggests that this group receives preferential treatment in the much more opaque policy decisions that get made in Washington every day. For example, Bartels (2007) shows how policymakers give much larger weight to the preferences of richer constituents.

What the Occupy Wall Street movement has done with its “We are the 99 percent” campaign is to remind Americans that economic outcomes are not just like the weather, something that must simply be endured and adapted to rather than forced to change. Instead, economic outcomes are shaped by political decisions. This insight is valuable because it confers the power to challenge the status quo, which is often preserved by claims that economic rewards are doled out through simple meritocracy and that any interference with market outcomes will wreck the economy. It’s not so. Markets are always shaped by policy, and policies in the United States have been shaped to benefit the already well-off. Changing the rules to ensure that rewards are more broadly shared can lead to an economy that is both more efficient and more fair.

The widening income gap

Figures A–C display trends in growth of overall market incomes, including wages and salaries as well as interest, dividend, and capital income generated by holding wealth. In the long period before the current recession, from 1979 to 2007, inflation-adjusted average annual incomes of the highest-income 1 percent of households grew by 224 percent, as shown in Figure A. Those even better off, the top 0.1 percent (the highest-income one one-thousandth of households), saw their incomes grow by 390 percent. In contrast, incomes of the bottom 90 percent grew just 5 percent between 1979 and 2007—and all of that growth occurred in the unusually strong income growth that occurred from 1997 to 2000, a period followed by declining income from 2000 to 2007.1 These data include all sources of market-based incomes such as wages and salaries, dividend and interest income, and realized capital gains, but do not include government transfer income (such as Social Security income or unemployment benefits).


Figure A

Because of their vastly greater income growth, the highest-earning 1 percent of households have rapidly distanced themselves from the vast majority (the bottom 90 percent). As Figure Bshows, average annual incomes of the top 1 percent of households in 1979 were 14 times greater than incomes of the bottom 90 percent; by 2007 incomes of the top 1 percent were 42 times greater. The income gap between the upper 0.1 percent of households and the bottom 90 percent grew even more, from a top-to-bottom ratio of 47-to-1 in 1979 to 220-to-1 in 2007.


Figure B

The vastly greater income growth of the top highest-income 1 percent of households also obtained a much larger share of income growth than the vast majority (the bottom 90 percent). As shown in Figure C, the top 1 percent gained 59.9 percent of all the income growth generated between 1979 and 2007. In contrast, the bottom 90 percent received just 8.6 percent of all the income generated over the same period. It’s illuminating to note that the bottom 90 percent were able to claim just one-fourth of what the top one one-thousandth of households claimed from the growth of that period (36 percent).


Figure C

Rising inequality in income from work

Figures D–F examine the rising inequality of wage and salary income—in other words, income from work. Labor earnings are by far the most evenly distributed sources of overall income because, after all, the vast majority of non-retired households have members that work. Yet labor earnings have become much more unequally distributed in recent decades. Figure D shows that the top 1 percent of wage and salary earners increased their inflation-adjusted average annual salaries by 144% from 1979 to 2006. The top one one-thousandth (0.1 percent) of earners enjoyed annual wages growth of 324 percent over that same period.


Figure D

In contrast, the bottom 90 percent of wage earners increased their annual salaries by about 15 percent from 1979 to 2006. Most of this growth occurred during the relatively brief period of tight labor markets that accompanied the late 1990s boom. Between 1979 and 1995, average annual wages for the lowest-earning 90 percent grew just 2.8 percent. And from 2000 and 2006, wages did not improve at all. Thus, nearly all of the wage and salary growth of the bottom 90 percent from 1979 to 2006 occurred from 1995 to 2000 when unemployment was falling and then remained low.2

As with overall incomes, the disparity in wage growth has significantly widened the gap in salary levels between the top earners and everyone else, as shown in Figure E. In 1979 average annual salaries of the top 1 percent of wage earners were 9.4 times that of those in the bottom 90 percent, but by 2000 the gap had more than doubled to 20-to-1, a level that was maintained until 2006.


Figure E

The very highest-wage earners—those in the upper 0.1 percent (the top one one-thousandth)—increased their distance from the earners in the bottom 90 percent even more rapidly; the ratio of their earnings to those in the bottom 90 percent rose from 21-to-1 in 1979 to 80-to-1 in 2000. This gap shrank after the stock market bubble burst in the late 1990s (wage data include the “realized stock options” that top corporate officers receive) but had nearly recovered its former size by 2006.

Figure F looks directly at the ratio of average compensation earned by the chief executive officers of large firms relative to the compensation of typical workers. In 1978, CEO compensation was 35 times greater than that of the typical worker, up from 24 times as great in 1965. After 1979 the pay of CEOs skyrocketed; by 2000 their pay was 299 times that the pay of a typical worker.


Figure F

That level of CEO pay was admittedly somewhat inflated by the stock market boom in the late 1990s, and retreated significantly after the tech bubble burst. However, by 2007, CEO pay had nearly restored itself, attaining a ratio of 277-to-1 relative to pay of a typical worker. CEO pay fell again relative to typical workers in the Great Recession but is again reestablishing itself in the recovery. In 2010, the ratio of 243-to-1 was the fifth highest of any year since 1965. At this rate, it will likely not take long for the gap to reach its prior peak.3

Increasing concentration of income from wealth-holding

Figures G–H show that the trend of rapidly growing concentration in overall income and labor earnings is also apparent in the growth of income earned from wealth-holding, often labeled either “unearned” or “capital” income. Essentially, capital incomes are always and everywhere less equally distributed than wage income. As shown in Figure G, in 1979 the top 1 percent of households on the income scale already claimed 38 percent of all capital income generated in the economy. By 2007 this share had ballooned to 57 percent. The next richest 9 percent saw their share of capital incomes shrink from 29 percent in 1979 to 23 percent in 2007. And the bottom 90 percent, which collected 33 percent of capital incomes in 1979, claimed only 20 percent by 2007. This startling concentration of already unequally distributed capital incomes defies the logic of claims that there is a natural limit to how much of the fruits of economic growth can go to any one group.


Figure G

The very large rise in the share of all capital incomes collected by the highest-income 1 percent since 1979 means that this group has also collected a disproportionate share of the growth in these incomes over the same period. Basically, if the top 1 percent’s share of all capital incomes had remained constant between 1979 and 2007, they would have claimed 37 percent of capital income growth in the economy in those years. Instead, as Figure H shows, the top 1 percent alone collected a whopping 86.5 percent of growth in capital incomes during this period.4 The next highest-income 4 percent claimed 10.7 percent of all capital income growth while the bottom 95 percent claimed just 2.8 percent of the growth in these incomes. This figure departs from the convention of the other charts in not isolating the bottom 90 percent because their average capital incomes fell between 1979 and 2007, registering as negative capital income growth, which is hard to depict in a pie chart.


Figure H

The financial sector’s increasing claim on growth

Much of the rising share of total income claimed by the top-earning 1 percent is associated with the rise of the financial sector, which is a dominant employer at the top.Figure I shows the share of total gross domestic product, or national income, attributable to compensation and profits in the corporate financial sector. Between 1929—just before the Great Depression ended the first Gilded Age—and 1973, this share fell from 3.7 percent to 3.2 percent. But between 1973 and 2007, this share more than doubled, to nearly 7 percent.


Figure I

And financial sector compensation and profits’ share of GDP rebounded quickly from the dip of the Great Recession and actually passed its pre-recession peak. By 2010, in fact, the rising share of finance translates into an extra $547 billion claimed by this sector relative to the case where its share had remained at its 1979 level (3.8 percent). This is serious money. The payoff to these larger claims made by the financial sector are dubious. For example, business investment in plant and equipment (i.e., the productivity-generating investment that financial firms are supposed to make cheaper and safer) did not rise between 1973 and 2007. Residential investment, outside of the bubble-inflated mid-2000s, has also failed to show any persistent upward climb during the time that the financial sector has claimed an ever-larger piece of the pie. It is, in short, not off-base to wonder whether there is any return to forking over a much larger share of economic activity to the financial sector.

The concentration of wealth

The concentration of wealth has mirrored trends in the concentration of income. Wealth is a measure of a household’s assets (such as real estate, stocks, bonds, and cash) minus their liabilities (such as home mortgages and other personal debt). The only available data covering recent decades dates back to 1983 and shows that the wealth held by the wealthiest 1% of households grew far more than the wealth of the median household, whose wealth was actually lower in 2009 than in 1983. Figure J shows that the wealth of the top 1 percent grew over the 1980s and ‘90s and by 2007 was 103 percent greater than in 1983. The financial crisis in 2008 reduced the wealth of those at the top but by 2009 their wealth remained 48 percent greater than in 1983. The median household’s wealth fared far worse. After falling in the early 1990s the median household’s wealth rose and was 48 percent greater in 2007 than in 1983. But the fall of wealth in the financial crisis was sharper for those in the middle than at the top because those in the middle have much of their wealth in housing, values of which fell dramatically after the housing bubble burst. By 2009 the median household’s wealth had fallen so much that their wealth was 13.5 percent less than what it was in 1983.5


Figure J

Not surprisingly, the gap between the wealth of those at the top and those in the middle substantially grew over the last few decades, as Figure K shows. In 1983 the wealthiest 1 percent of households had wealth that was 131 times greater than wealth of the median household. This gap grew until the early 1990s and again in the 2000s, and by 2009 the top 1 percent had 225 times as much wealth as the median household.6


Figure K

Perhaps more startlingly, more than 94 percent of the gains in wealth from 1983 to 2009 accrued to the top fifth of wealthiest households, with 40.2 percent of the gains going to the wealthiest 1 percent and 41.5 percent going to the next wealthiest 4 percent of households (Figure L). This translated to gains among the wealthiest 1 percent of $4.5 million per household and gains among the next wealthiest 4 percent of roughly $1.2 million per household.7


Figure L

In other words, the richest 5 percent of households obtained roughly 82 percent of all the nation’s gains in wealth between 1983 and 2009. The bottom 60 percent of households actually had less wealth in 2009 than in 1983, meaning they did not participate at all in the growth of wealth over this period.

Basing policy in the true picture of income and wealth

The insights offered by the data on income, wealth, and inequality should shape the economic policy debate going forward. Most immediately, they should inform budget deficit debates about what the United States can “afford.” The nation can easily afford more federal government support aimed at reducing today’s historically high and persistent rates of joblessness. In fact it is the cheapest option in all major economic respects (Mishel 2011).

Once the current crisis of joblessness has passed and smaller imbalances between federal investment and revenues are appropriately targeted, attention should turn to supporting the same level of economic security and dignity that we have provided for generations. This would mean ending the unnecessary calls to close budget deficits by cutting the benefits provided by Social Security, Medicare, and Medicaid.

Thirty years of economic data show that the U.S. economy has generated significant levels of income and should continue to do so into the future; in other words, there is no economicconstraint that mandates that we scale back expectations for living standards growth in coming years (Mishel 2011). But this vast income that has been generated has been distributed in an extremely skewed fashion; typical American families have not benefitted from it nearly as much as they could have. This is a political problem that, if solved, has the potential to make our country more fair and the vast majority of its citizens more prosperous.

The politics of economic policymaking may be broken, but the U.S. economy is not broke, the data show. The country does have the economic wherewithal to provide a decent standard of living for all.


1. Economic Policy Institute analysis of “Table A6: Top fractiles income levels (including capital gains) in the United States” from “Income Inequality in the United States, 1913-1998” with Thomas Piketty, Quarterly Journal of Economics, 118(1), 2003, 1-39 (Longer updated version published in A.B. Atkinson and T. Piketty eds., Oxford University Press, 2007) (Tables and Figures updated to 2008 in Excel format, July 2010).

2. Based on Table 3.10 in Mishel, Bernstein, and Shierholz (2009), which uses data from Kopczuk, Saez and Song (2007), Table A-3. Data in Table 3.10 for 2006 was extrapolated from 2004 data using growth rates from Social Security Administration wage statistics ( SSA provides data on share of total wages and employment in annual wage brackets such as for those earning between $95,000.00 and $99,999.99. We employ the midpoint of the bracket to compute total wage income in each bracket and sum all brackets. Our estimate of total wage income was 99.1 percent of the actual. We used interpolation to derive cutoffs building from the bottom up to obtain the 0–90 percent bracket and then estimating the remaining categories. This allowed us to estimate the wage shares for upper wage groups. To obtain absolute wage trends we used the SSA data on the total wage pool and employment and computed the real wage per worker (based on their share of wages and employment) in the different groups.

3. The CEO pay data are described in the table note for table 3.41 in Mishel, Bernstein, and Shierholz (2009).The compensation data for typical workers comes from the Bureau of Labor Statistics’ series on average hourly earnings of production, non-supervisory workers inflated to compensation using the ratio of compensation to wages in the Bureau of Economic Analysis National Income and Product Accounts.

4. The data in Figure G comes directly from the Congressional Budget Office, which calculates the share of all capital income going to various income groupings. Figure H is calculated by EPI with slightly different data, specifically the CBO estimates of average incomes’ sources of incomes by income groupings. What are being labeled as growth in capital incomes between 1979 and 2007 in Figure H are dividends, interest payments, capital gains, and “other business income,” which includes partnership income, income from S corporations, and rental income.

5. The data on wealth are based on Wolff’s analysis of the Federal Reserve Board’s Survey of Consumer Finances presented in Table 3 of Allegretto (2010)

6. Ibid.

7. Ibid.


Allegretto, Sylvia. 2009. The State of Working America’s Wealth, 2011: Through Volatility and Turmoil the Gap Widens. Economic Policy Institute Briefing Paper #292. Washington, D.C.: EPI.

Bartels, Larry M. 2008. Unequal Democracy: The Political Economy of the New Gilded Age. Princeton, N.J.: Princeton University Press.

Bivens, Josh. 2011. Failure by Design: The Story behind America’s Broken Economy. An Economic Policy Institute Book. Ithaca, N.Y.: ILR Press, an imprint of Cornell University Press.

Congressional Budget Office (CBO). June 2010. “Average Federal Tax Rates for All Households, by Comprehensive Household Income Quintile.” Washington, D.C.: CBO.

Hacker, Jacob S. and Paul Pierson. 2010. Winner-Take-All Politics: How Washington Made the Rich Richer – And Turned Its Back on the Middle Class. New York: Simon & Schuster.

Mishel, Lawrence. 2011. We’re not broke nor will we be: Policy choices will determine whether rising national income leads to a prosperous middle class. Economic Policy Institute Briefing Paper #310. Washington, D.C.: EPI.

Mishel, Lawrence, Jared Bernstein, and Heidi Shierholz. 2009. The State of Working America 2008/2009. An Economic Policy Institute Book. Ithaca, N.Y.: ILR Press, an imprint of Cornell University Press.

Piketty, Thomas and Emmanuel Saez. 2010. Excel tables and figures with 2008 data updating “Income Inequality in the United States, 1913–1998,” Quarterly Journal of Economics, 118(1), 2003, 1–39 (longer updated version published in A.B. Atkinson and T. Piketty eds., Oxford University Press, 2007).

The ECB’s Battle against Central Banking


The ECB’s Battle against Central Banking

BERKELEY – When the European Central Bank announced its program of government-bond purchases, it let financial markets know that it thoroughly disliked the idea, was not fully committed to it, and would reverse the policy as soon as it could. Indeed, the ECB proclaimed its belief that the stabilization of government-bond prices brought about by such purchases would be only temporary.

It is difficult to think of a more self-defeating way to implement a bond-purchase program. By making it clear from the outset that it did not trust its own policy, the ECB practically guaranteed its failure. If it so evidently lacked confidence in the very bonds that it was buying, why should investors feel any differently?

The ECB continues to believe that financial stability is not part of its core business. As its outgoing president, Jean-Claude Trichet, put it, the ECB has “only one needle on [its] compass, and that is inflation.” The ECB’s refusal to be a lender of last resort forced the creation of a surrogate institution, the European Financial Stability Mechanism. But everyone in the financial markets knows that the EFSF has insufficient firepower to undertake that task – and that it has an unworkable governance structure to boot.

Perhaps the most astonishing thing about the ECB’s monochromatic price-stability mission and utter disregard for financial stability – much less for the welfare of the workers and businesses that make up the economy – is its radical departure from the central-banking tradition. Modern central banking got its start in the collapse of the British canal boom of the early 1820’s. During the financial crisis and recession of 1825-1826, a central bank – the Bank of England – intervened in the interest of financial stability as the irrational exuberance of the boom turned into the remorseful pessimism of the bust.

In his book Lombard Street, Walter Bagehot quoted Jeremiah Harman, the governor of the Bank of England in the 1825-1826 crisis:

“We lent…by every possible means and in modes we had never adopted before; we took in stock on security, we purchased exchequer bills, we made advances on exchequer bills, we not only discounted outright, but we made advances on the deposit of bills of exchange to an immense amount, in short, by every possible means consistent with the safety of the Bank, and we were not on some cases over-nice. Seeing the dreadful state in which the public were, we rendered every assistance in our power…”

The Bank of England’s charter did not give it the legal authority to undertake such lender-of-last-resort financial-stability operations. But the Bank undertook them anyway.

Half a generation later, Britain’s Parliament debated whether the modifications of the Bank’s charter should give it explicit power to conduct lender-of-last-resort operations. The answer was no: granting explicit power would undermine confidence in price stability, for already there was “difficulty restrain[ing] over-issue, depreciation, and fraud.” Indeed, granting explicit lender-of-last-resort powers to the Bank of England would mean that the “millennium of the paper-mongers would be at hand.”

But the leaders of Parliament also believed that the absence of a codified authority to act as lender of last resort would not keep the Bank of England from doing so when necessity commanded. As First Lord of the Treasury Sir Robert Peel wrote: “If it be necessary to assume a grave responsibility, I dare say men will be willing to assume such a responsibility.”

Our current political and economic institutions rest upon the wager that a decentralized market provides a better social-planning, coordination, and capital-allocation mechanism than any other that we have yet been able to devise. But, since the dawn of the Industrial Revolution, part of that system has been a central financial authority that preserves trust that contracts will be fulfilled and promises kept. Time and again, the lender-of-last-resort role has been an indispensable part of that function.

That is what the ECB is now throwing away.

J. Bradford DeLong, a former assistant secretary of the US Treasury, is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau for Economic Research.

Copyright: Project Syndicate, 2011.