The debate over the extent and causes of rising inequality of American incomes and wages has now raged for at least two decades. In this paper, we will make four arguments. First, the increase in the incomes and wages of the top 1 percent over in the last three decades should largely be interpreted as driven by the creation and/or redistribution of economic rents, and not simply as the outcome of well-functioning competitive markets rewarding skills or productivity based on marginal differences. This rise in rents accruing to the top 1 percent could be the result of increased opportunities for rent-shifting, increased incentives for rent-shifting, or a combination of both. Second, this rise in incomes at the very top has been the primary impediment to living standards growth for low and moderate-income households approaching the growth rate of economy-wide productivity. Third, because this rise in top incomes is largely driven by rents, there is the potential for checking (or even reversing) this rise through policy measures with little to no adverse impact on overall economic growth. Lastly, this analysis suggests two complementary approaches for policymakers wishing to reverse the rise in the top 1 percent’s share of income: dismantling the institutional sources of their increased ability to channel rents their way and/or reducing the return to this rent-seeking by significantly increasing marginal rates of taxation on high incomes.
The realization that top tear incomes are not connected to achievement, expertise, the noble forces of mythical perfect markets is an important concept for people to understand. Compensation of CEOs has become largely disconnected from merit. It is a cultural phenomenon with economic effects, not the result of market forces. There are certainly people in that income bracket with a conscience and realize this. On the other hand we have people with power and money. Historically and all too often psychologically, people with both will do and say whatever they have to in order to keep that money and power.