Sunny Sundays and Executive Earnings

It’s a comfortably warm day in New York, and 5-month old Sebastian and I have just returned from an early morning walk, where we engaged in one of life’s great pleasures – sitting the sun reading the Sunday New York Times (Sebastian didn’t last terribly long with reading, but was happily engaged for at least 10 minutes in slowly crumpling up a glossy souvenir picture of the 1999 Yankees),

What struck me today was another front page article by the Times that draws upon Thomas Piketty and Emmanuel Saez’s work on top income shares in the United States. This must be at least the tenth time the newspaper has drawn on the Piketty-Saez study, and this time they look at the richest 0.01% – melding the data with interviews with corporate scions who either take the view that the money is a reflection of their own unique skills, or that their earnings are a product of the society in which they live. Here’s a snippet:

Other very wealthy men in the new Gilded Age talk of themselves as having a flair for business not unlike Derek Jeter’s “unique talent” for baseball, as Leo J. Hindery Jr. put it. “I think there are people, including myself at certain times in my career,” Mr. Hindery said, “who because of their uniqueness warrant whatever the market will bear.”

He counts himself as a talented entrepreneur, having assembled from scratch a cable television sports network, the YES Network, that he sold in 1999 for $200 million. “Jeter makes an unbelievable amount of money,” said Mr. Hindery, who now manages a private equity fund, “but you look at him and you say, ‘Wow, I cannot find another ballplayer with that same set of skills.’ ”

A legendary chief executive from an earlier era is similarly critical. He is Robert L. Crandall, 71, who as president and then chairman and chief executive, led American Airlines through the early years of deregulation and pioneered the development of the hub-and-spoke system for managing airline routes. He retired in 1997, never having made more than $5 million a year, in the days before upper-end incomes really took off.

He is speaking out now, he said, because he no longer has to worry that his “radical views” might damage the reputation of American or that of the companies he served until recently as a director. The nation’s corporate chiefs would be living far less affluent lives, Mr. Crandall said, if fate had put them in, say, Uzbekistan instead of the United States, “where they are the beneficiaries of a market system that rewards a few people in extraordinary ways and leaves others behind.”

“The way our society equalizes incomes,” he argued, “is through much higher taxes than we have today. There is no other way.”

Part of the reason this fascinates me is that much of my own research at present is on top incomes, including a paper that puts together the various top incomes series from 13 developed countries into a comparable dataset, a paper on the effect of top incomes on health, and work in progress on the effect of top incomes on growth, top incomes and savings, and the effect of top taxes on top income shares.

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5 Responses to Sunny Sundays and Executive Earnings

  1. Kevin Cox says:

    Andrew why do you express this as the effect of top income on health rather than the effect of health on top incomes? It is interesting that you are looking at the effect of top taxes on top income shares rather than top income on top taxes. I was wondering what makes you choose one way rather than the other – or doesn’t it matter and you look at both ways anyway.

    It is a pity you cannot measure “luck” or being in the right place at the right time and being in a position to seize the opportunity.

  2. “This must be at least the tenth time the newspaper has drawn on the Piketty-Saez study,”

    Your paper (with Joshua Gans) on birth dates has also done very well in getting multiple mentions, still being reported as news in the last week or so months after the original paper.

  3. Andrew Leigh says:

    Kevin, most of the theory is about how inequality affects health, rather than the other way around. But since we find no effect, you should feel free to interpret the result either way.

  4. Fred Argy says:

    Andrew, thanks. I had a quick look at your article which concludes that there is a strong positive relationship between top income shares and other measures of inequality. This puzzles me.

    Australia is surely a classic example of the traps involved in using income shares based on pre-tax incomes as a guide to the comparative levels of – and trends in – inequality. In international terms, we rank among the most unequal in gross terms (pre-taxes and transfers) but about average on the GINI. And while gross income inequality has been tending to increase in Australia, this has not shown up in the GINI – at least over the last twenty years or so. In most other countries the GINI has been rising. Our governments have obviously been more active in using the tax/transfer system to redistribute.

  5. Andrew Leigh says:

    Fred, it’s not a 1 for 1 relationship, and the biggest exception is clearly taxes and transfers. However, your favourite story about factors affecting the pre-tax income distribution (unions, skill-biased tech change, trade, immigration), probably has the same implications for the gini as for the share of the richest 10%.

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