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"In addition to wages, the census includes dividends, rental income and cash benefits (like Temporary Assistance for Needy Families and unemployment benefits).

"In addition to wages, the census includes dividends, rental income and cash benefits (like Temporary Assistance for Needy Families and unemployment benefits). But it excludes noncash benefits like food stamps (which benefit the poor) and capital gains (which tend to benefit the rich)." This is really a strange way to look at it. It is comparing the 'rich' middle class to the rest of the middle class and ignoring the extremes. Whenever a great profit is being made, basic theory says that the market should work to push things back to normal. When that doesn't happen it is an indicator that something is off-kilter. So, what is off-kilter here? What occupations are at the tip of the elephant's trunk? Why aren't the people riding the elephant's back pushing into that part of the market? Is it an education problem? A capital allocation problem? Regulatory capture? This is the question that needs answering.

rayiner 10y ago
You're confusing two different things. Theories of markets say that in the long term competition will drive profits in any given industry to a nominal level. They don't say that the people who already have capital won't be able to use that capital to keep riding the wave of large profits in industries before they hit equilibrium.
- clavalle 10y ago
  The only think I'm confused about is what 'long term' means. Seems like this has been trending since at least the 80's. How long does/should the wave of large profits last until we recognize it as a symptom of a problem?
  - rayiner 10y ago
    No theory of markets says that in the long term "profits" in general go to zero. Just profits in competitive industries. E.g. steel used to be very profitable. Not so much now. PCs used to be very profitable. Now profits in the PC industry are nominal. But there are always new industries that haven't hit that equilibrium yet.
- yummyfajitas 10y ago
  Actually it's you who is confused. The return on capital is currently very low in most sectors, and people who have capital have no particular ability to keep profits high. Income inequality is primarily about two things: earned income and capital gains from housing wealth. The latter is a non-competitive market due mainly to NIMBYs keeping supply artificially low.
- deleted 10y ago
  [deleted]
yummyfajitas 10y ago
It's not profits that will drop to zero, it's economic profits. That includes implicit costs, which are excluded by accounting profits. http://www.investopedia.com/ask/answers/033015/what-difference-between-economic-profit-and-accounting-profit.asp http://www.investopedia.com/ask/answers/033015/what-differen... Of course, this is irrelevant to a graph of market income. Market income simply reflects how scarce certain skillsets are, income is not profit. The answer of why people aren't riding the elephants back onto the trunk might simply be because they can't - the implicit costs are too high. For example, suppose I gave you $1M to spend. Could you turn a nurse into a top trader, managing a $50M book? What if I gave you $2M? One very interesting theory about why this increase is happening now is the headhunter theory: historically, oligopolistic corporations were keeping pay down for the highest productivity employees. Now, as the market has become more competitive, executives/traders/high end developers/etc are better able to capture a larger piece of their true economic value. https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=EEAESEM2016&paper_id=1093 https://editorialexpress.com/cgi-bin/conference/download.cgi...
- clavalle 10y ago
  Can income be considered a type of profit in this context? I'm not an expert, but at first blush the term 'implicit costs' seems to be so much handwaving. I'm sure there is something concrete there somewhere but to just say 'Well these top earners naturally far outstrip other people and maintain that position over long periods of time without anyone jumping onto their boat because of implicit costs' seems a bit too magical to be useful.
  - yummyfajitas 10y ago
    No, income is not profit. It's just the price of a good. There is no economic law that the price of gold should fall to the same price as other metals. Rather, economics says that if gold mining is a competitive industry, gold production will increase until the economic profit on producing more drops to the same level as economic profits in all other productive directions. Concretely, to understand why top earners outstrip others, it's important to figure out who they are. A lot of them are traders. A trader earning $20M/year makes that much because his trading desk produces $200M/year for the hedge fund he works for, and because no one else can. Now, suppose you want to take a nurse making $40k/year and bring her up to the trader's level. Suppose I give you $500k. Do you think you can do it? Concretely speaking, and without handwaving, what would you spend the money on? A harvard education (using up $240k already) is far from sufficient. Forget even bringing her into the 0.1%. How much money would you need to spend, and what would you spend it on, for her to reliably become a mid-level developer earning $200k/year? The implicit costs are hard to pin down. But when you ask how to move a specific person into a specific 1% or even 10% job, it suddenly becomes a lot clearer why this is hard.
jackcosgrove 10y ago
> So, what is off-kilter here? Unfortunately, at least in the software industry, not everyone can do the work. There is a barrier to entry that may be grounded in innate ability and is exacerbated by educational inequality. As evidence of the former, I would point to all of the first-year engineering students who drop their major because they struggle with the work. These people have same educational opportunities at the collegiate levels as those who don't drop. There may be inequalities with primary and secondary educational opportunities that follow a student into college, but this is not the problem in all cases. In the terminology of Michael Porter, this is an almost perfect moat: it limits barrier to entry, it's widely accepted by those who must pay higher prices as a result, and it costs little to enforce. Contrast the latter point with medical careers, whose practitioners must pay much in time and money to dig an institutional moat that prevents competitors from entering their employment market. If software is indeed eating the world, this problem will only get worse.

rayiner 10y ago

You're confusing two different things. Theories of markets say that in the long term competition will drive profits in any given industry to a nominal level. They don't say that the people who already have capital won't be able to use that capital to keep riding the wave of large profits in industries before they hit equilibrium.

clavalle 10y ago
The only think I'm confused about is what 'long term' means. Seems like this has been trending since at least the 80's. How long does/should the wave of large profits last until we recognize it as a symptom of a problem?
- rayiner 10y ago
  No theory of markets says that in the long term "profits" in general go to zero. Just profits in competitive industries. E.g. steel used to be very profitable. Not so much now. PCs used to be very profitable. Now profits in the PC industry are nominal. But there are always new industries that haven't hit that equilibrium yet.
yummyfajitas 10y ago
Actually it's you who is confused. The return on capital is currently very low in most sectors, and people who have capital have no particular ability to keep profits high. Income inequality is primarily about two things: earned income and capital gains from housing wealth. The latter is a non-competitive market due mainly to NIMBYs keeping supply artificially low.
deleted 10y ago
[deleted]

yummyfajitas 10y ago

It's not profits that will drop to zero, it's economic profits. That includes implicit costs, which are excluded by accounting profits. http://www.investopedia.com/ask/answers/033015/what-difference-between-economic-profit-and-accounting-profit.asp http://www.investopedia.com/ask/answers/033015/what-differen... Of course, this is irrelevant to a graph of market income. Market income simply reflects how scarce certain skillsets are, income is not profit. The answer of why people aren't riding the elephants back onto the trunk might simply be because they can't - the implicit costs are too high. For example, suppose I gave you $1M to spend. Could you turn a nurse into a top trader, managing a $50M book? What if I gave you $2M? One very interesting theory about why this increase is happening now is the headhunter theory: historically, oligopolistic corporations were keeping pay down for the highest productivity employees. Now, as the market has become more competitive, executives/traders/high end developers/etc are better able to capture a larger piece of their true economic value. https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=EEAESEM2016&paper_id=1093 https://editorialexpress.com/cgi-bin/conference/download.cgi...

clavalle 10y ago
Can income be considered a type of profit in this context? I'm not an expert, but at first blush the term 'implicit costs' seems to be so much handwaving. I'm sure there is something concrete there somewhere but to just say 'Well these top earners naturally far outstrip other people and maintain that position over long periods of time without anyone jumping onto their boat because of implicit costs' seems a bit too magical to be useful.
- yummyfajitas 10y ago
  No, income is not profit. It's just the price of a good. There is no economic law that the price of gold should fall to the same price as other metals. Rather, economics says that if gold mining is a competitive industry, gold production will increase until the economic profit on producing more drops to the same level as economic profits in all other productive directions. Concretely, to understand why top earners outstrip others, it's important to figure out who they are. A lot of them are traders. A trader earning $20M/year makes that much because his trading desk produces $200M/year for the hedge fund he works for, and because no one else can. Now, suppose you want to take a nurse making $40k/year and bring her up to the trader's level. Suppose I give you $500k. Do you think you can do it? Concretely speaking, and without handwaving, what would you spend the money on? A harvard education (using up $240k already) is far from sufficient. Forget even bringing her into the 0.1%. How much money would you need to spend, and what would you spend it on, for her to reliably become a mid-level developer earning $200k/year? The implicit costs are hard to pin down. But when you ask how to move a specific person into a specific 1% or even 10% job, it suddenly becomes a lot clearer why this is hard.

jackcosgrove 10y ago

> So, what is off-kilter here? Unfortunately, at least in the software industry, not everyone can do the work. There is a barrier to entry that may be grounded in innate ability and is exacerbated by educational inequality. As evidence of the former, I would point to all of the first-year engineering students who drop their major because they struggle with the work. These people have same educational opportunities at the collegiate levels as those who don't drop. There may be inequalities with primary and secondary educational opportunities that follow a student into college, but this is not the problem in all cases. In the terminology of Michael Porter, this is an almost perfect moat: it limits barrier to entry, it's widely accepted by those who must pay higher prices as a result, and it costs little to enforce. Contrast the latter point with medical careers, whose practitioners must pay much in time and money to dig an institutional moat that prevents competitors from entering their employment market. If software is indeed eating the world, this problem will only get worse.