Tuesday, January 28, 2014

Income Inequality drivers: the trends being ignored

With the next State of the Union Address scheduled for this evening, we already know what some of the major themes will be. Consistent with Administration and Democrat talking points that have been permeating punditry land since the New Year, one of these themes will be the issue of income inequality. Many of you have probably read some of the articles out there on this, seen talking heads going on and on about it, and may quite possibly feel like the issue is actually very important, is actually something about which we--as a nation--should be concerned.

And that's more than fair, in my opinion. It is an important issue that requires attention from everyone, because it's not right, at all. There is too much wealth at the top of the pyramid right now and too little at the bottom.

Of course, this has always been the case. The people at the tippy-top have always had far more than those at the bottom, in any sufficiently large society during any period of history. It was true for the "Robber Baron" period in U.S. History, the "Warring States" period in Chinese history, the periods of Ancient Rome, both Empire and Republic, Medieval Europe, the Mayan Empire, the European eras of "Exploration" and "Colonization," Ancient Egypt, the apogee of the Kingdom of Mali, Feudal Japan, and pretty much any other example one might think of. It was even true--hold on to your hats--for the Soviet Union and for pre-European North America, among large societies like the Iroquois League.

The issue is how much is too much, in terms of both the relative disparity in income between top and bottom, and the numbers of people in the bottom group. To this end, there are a lot of studies, statistics, and charts out there being used to demonstrate how this disparity has grown (exponentially, usually) in the past several generations, the past forty to fifty years. The argument being made by most people who are focused on the issue is simple: there is more disparity now than ever before between the top and the bottom. Here's a very typical piece making the argument, complete with handy charts, at Mother Jones. Note that one of these charts--"Average CEO Pay vs. Average Worker Pay"--is pretty much nonsense, because it's really not using average CEO pay at all, something I've addressed in detail previously.

Still, many of the other charts--not all of them--are fair representations of reality. Look at the first one, the "big reveal," as it were:

In this chart, the numbers are staggering. The top tier has an average income in excess of $23 million dollars per year, while 90% of the population has an average household income of less than $30 grand per year. Of course, that "top tier" is only .01% of all households. In 2010, there were just under 150 million households in the U.S., so that means that about 15,000 households make up that top .01%. Are they all making $23 million? Not even close. That number is the average, and just as overall incomes are skewed by huge numbers at the top, so too are the numbers in just this group. Because if one were to look at the top .001% or the top .0001% (1,500 households and 150 households, respectively), there would be an even bigger gap. The last group would be pushing the $100 million mark or more in average income without a doubt.

And there's no way around it, that's an obscene amount of money. What could someone possibly do to deserve such money? In reading all of the pieces out there on income inequality, you'd probably get the the idea--because it is what is being pushed--that the people making these kinds of incomes are corporate fat cats, Wall Street executives, hedge fund managers, and the like. And some of them are. Of course, some of them are athletes, musicians, and entrepreneurs, as well.

Since the above numbers are from  2010, let's look at some highly compensated people from that same year. First, Hollywood:
10. Robert Downey Jr.- $31,000,000
9. Taylor Lautner- $33,500,000
8. Todd Phillips- $34,000,000
7. Adam Sandler- $50,000,000
6. Tim Burton- $53,000,000
5. Leonardo DiCaprio- $62,000,000
4. Christopher Nolan-$71,500,000
3. Steven Spielberg- $80,000,000
2. Johnny Depp- $100,000,000
1. James Cameron- $257,000,000
Next, the world of sports(U.S.-based athletes only):
10. Dwayne Wade- $27,779,912
9. Peyton Manning- $30,800,000
8. Derek Jeter- $31,000,000
7. Kobe Bryant- $33,034,375
6. Shaquille O' Neal- $36,000,000
5. Alex Rodriguez- $37,000,000
4. LeBron James- $45,779,912
3. Floyd Mayweather Jr- $60,250,000
2. Phil Mickelson- $61,660,757
1. Tiger Woods- $90,508,163
And finally, musicians (I've tried to limit it to U.S.-based individual artists, only):
10. Kenny Chesney- $30,000,000
9. Tim McGraw- $35,000,000
8. Sean “Diddy” Combs- $35,000,000
7. Jay-Z- $37,000,000
6. Brad Paisley- $40,000,000
5. Katy Perry- $44,000,000
4. Taylor Swift- $45,000,000
3. Usher- $46,000,000
2. Toby Keith- $50,000,000
1. Lady Gaga-$90,000,000

Now, that's thirty people whose 2010 earnings put them firmly in the top .01%. In fact, a good chunk of them are likely in the top .001%. Some are even members of the the elite 150 households in the top .0001%. And these are just the top ten from these three fields. Consider that in 2010, the average NBA salary--which doesn't include endorsement deals--was in excess of $5 million per year. The average MLB salary for 2010 was over $3 million. For the NFL it was almost $2 million. And for the NHL it was over $2 million. And again, the top salaries in each sport are skewing the number higher.

Still, we're talking about almost 3,600 people here--not including coaches and management--making well in excess of $2 million per year on average. And again, this doesn't include endorsement deals or any other outside incomes (the fact of the matter is that pro-athletes look to invest their monies to make more money, just like everyone else with access to such capital). Remember, the top 1% of households average just over $1 million in income. Most these pro athletes are in this group. Many are in the top .1%.

And then there's the Hollywood crowd, the big time actors, producers, and directors. And the the top tier of musical artists (and recording executives). I can't provide authoritative totals for their numbers, with regard to salaries in the top 1% and higher, but I'm certain there are far more than just the ones I noted above. Hell, take a look at this list from 2012 that details salaries of various TV folks. Mark Harmon makes $500,000 per episode of NCIS. That's $12,000,000 for a season (assuming 24 episodes). And that's chicken-feed compared to people like Letterman and Judge Judy.

In short, there are a lot of people making a lot of money in the worlds of sports and entertainment. And frankly, that's fine. I'm not questioning any of this; I'm not suggesting these folks are somehow taking from everyone else, at all. What I am doing, however, is establishing the basis for a trend--when it comes to income inequality--that no one else seems to have noticed. All those people with charts showing how inequality has increased in the last forty or fifty years take it as a given that--as I noted above--corporate fat cats, Wall Street executives, hedge fund managers, and the like are driving this change. But what about sports and entertainment?

In 1970, Bob Gibson was the highest paid player in baseball, with a salary on $150,000. In 2010 dollars, that would be a salary of about $850,000. A lot of money, to be sure, but substantially less than A-Rod's $37 million. Indeed, it would less than a third of the 2010 average for MLB players. So what was the average salary of a player in 1970, you ask? Why it was just over $29,000. In 2010 dollars, that would be about $163,000, or about 5.4% of the 2010 average salary.

Let's be clear about this: from 1970 to 2010, the average salary for a MLB player increased from $163,000 to $3,000,000 (figured in 2010 dollars). That's an increase of over 1800%! Guess what, that's a bigger increase than what is being cited for CEO salaries and the like for the same period.

If one were to look at the other sports and other industries here, similar patterns would emerge. Yet no one is talking about these industries driving the growth in income inequality, while CEO pay is always at the top of the list. So let's be clear about the number there, too: when you see those 185/300/400 to 1 tables comparing CEO to worker salaries, what you are looking at are the top 100 to 500 most highly paid CEOs only. No more. And in terms of actual income, the average is between $5.5 million and $12 million for each CEO. Somehow, these numbers drive the change, are a part of the problem, while even greater numbers of people in the sports and entertainment industries with average salaries in the same range as CEOs don't drive the change, aren't worth talking about.

Yeah, okay. That seems fair...

Cheers, all.

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