The rich, the super-rich, and the super-duper-galaxy-devouring-black-hole-size rich

(I apologize for the fact that this picture is not nearly as cute as the one in the previous post.)

Peter Orszag, director of the Congressional Budget Office, explains the conclusions of Clark Medal winning economist Emmanuel Saez:

[T]he share [of national income] going to the top 10 percent [of earners] was around 45 percent from the mid-1920s to 1940, but then declined to approximately 33 percent during World War II...After the war, the share of income accruing to the top 10 percent remained essentially flat until the late 1970s, when it began climbing dramatically, ultimately surpassing its pre-war highs. Indeed, in 2006, the top 10 percent earned 50 percent of national income[.]

But that's not the whole story...

Perhaps even more interesting...is what [Saez] found [regarding] the top 1 percent of earners—namely, that virtually all the historical fluctuation in the share of income going to the top 10 percent was due to fluctuations in income within the top percentile alone...Stated differently, the dramatic changes in income inequality seen in the United States over the last century are almost entirely a function of how well the very highest earners did at any given point in time.

And in the most recent past, the very highest earners did very well indeed, capturing almost three-quarters of total income growth in the economic expansion of 2002 to 2006, while the remaining 99 percent of the U.S. population split among themselves the final 25 percent of the increase.

This is not a story about the middle class separating into upper and lower tiers. This is not even a story about the rich pulling away from the middle class. The big story of the past 20 years is the super-duper-duper rich pulling away from the rich and the middle class.

That makes a lot of sense to me. I've lived through pretty much all of that giant spike in inequality, but I haven't seen lot of evidence of it. That's probably because the rich people I know are mostly in the top 10-5% or the top 5-1%; the super-duper-duper rich are so rich that most of us don't even see them spend their money. But they're out there, buying exponentially more and more private jets and islands and whatever while the rest of us essentially live the same lifestyle our parents lived in the 80s.

What happened? In a word, finance. That giant crash and subsequent run-up in the earnings of the Top 1% coincides with the giant crash and subsequent run-up in the financial sector's share of U.S. corporate profits. And that coincides with the big increase and subsequent rapid decrease in the level that the U.S. government regulates our financial sector. Some of the super-duper-duper rich are CEOs, but most are investors, investment bankers, hedge fund managers, etc. A successful tech entrepreneur in Palo Alto once told me: "If you want to really make the big money, don't start your own company; be the guy who moves other people's money around." It seems he was right.

Matt Yglesias and others have chosen to focus on the tax policy implications of Saez's work; they think extra tax on the super-duper-duper rich is the logical policy. And they may be right, but it seems obvious to me that if you really want to bring inequality down, the most important policy is to increase financial-sector regulation. Which, given the fact that financial deregulation also seems to cause massive super-bubbles that end in depressions, is a very smart policy anyway. So we have an opportunity to kill two birds with one stone.

In other news, financial sector compensation levels have just bounced back to their pre-crisis levels. And Citigroup just asked to use government bailout money to increase bonuses for its "key employees."