Changing the Income Inequality Debate

An important paper by Steve Kaplan and Joshua Rauh, pointed by Tyler Cowen, who says this:

Here is the link, here is the non-gated version. How about this bit from the text?:

...the top 25 hedge fund managers combined appear to have earned more than all 500 S&P 500 CEOs combined (both realized and estimated).

This is important too:

...we do not find that the top brackets are dominated by CEOs and top executives who arguably have the greatest influence over their own pay. In fact, on an ex ante basis, we find that the representation of CEOs and top executives in the top brackets has remained constant since 1994. Our evidence, therefore, suggests that poor corporate governance or managerial power over shareholders cannot be more than a small part of the picture of increasing income inequality, even at the very upper end of the distribution. We also discuss the claim that CEOs and top executives are not paid for performance relative to other groups. Contrary to this claim, we find that realized CEO pay is highly related to firm industry-adjusted stock performance. Our evidence also is hard to reconcile with the arguments in Piketty and Saez (2006a) and Levy and Temin (2007) that the increase in pay at the top is driven by the recent removal of social norms regarding pay inequality. Levy and Temin (2007) emphasize the importance of Federal government policies towards unions, income taxation and the minimum wage. While top executive pay has increased, so has the pay of other groups, particularly Wall Street groups, who are and have been less subject to disclosure and social norms over a long period of time. In addition, the compensation arrangements at hedge funds, VC funds, and PE funds have not changed much, if at all, in the last twenty-five or thirty years (see Sahlman (1990) and Metrick and Yasuda (2007)). Furthermore, it is not clear how greater unionization would have suppressed the pay of those on Wall Street. In other words, there is no evidence of a change in social norms on Wall Street. What has changed is the amount of money managed and the concomitant amount of pay.

There is a great deal of analysis and information (though to me, not many surprises) in this important paper. The authors also find no link between higher pay and the relation of a sector to international trade.

The broader the literature gets in studying the make-up and causes for the big wage share gains by the top 1%, 0.1%, and 0.01% of the income distribution, the more it looks like the system isn't biased in favor of the rich, as so many left-of-center economists shrilly maintain. It looks like Superstar Economics combined with incentivized tax shifting is the major cause of increased inequality. It looks like Piketty-Saez aren't the end of the discussion. It looks like more natural workings of the economy, even if there is some irrationality behind it (i.e. huge pay increases for hedge fund managers).

I'm waiting for Krugman's inevitable reply with baited breath.