In Striking It Richer, award-winning economist Emmanuel Saez writes about the fraction of income gains “captured” by the top 1% of income earners. Annie Lowrey‘s interesting profile of Saez and Thomas Piketty states that their research “shows that the top earners in the United States have taken a bigger and bigger share of overall income.” The words “captured” and “taken” are misleading because income earners don’t confiscate the income or assets of others, nor can they coerce consumers to buy their products or services.
A simple substitution of one word can change the interpretation of an entire article. The statement that top earners have contributed a bigger and bigger share of overall income in the past few decades is less politically-charged. Saez, a MacArthur “genius” award winner, knows that earned income is a measure of what someone contributes to the economy, and not resources that have been “taken” or “captured.” By writing about income gains that are “captured”, he encourages the mistaken point of view that the U.S. economy is zero-sum.
In a free market economy one’s income is approximately equal to the dollar value of his/her marginal contribution to output. Marginal values tend to be higher for commodities and factors of production that are scarce, like diamonds or highly skilled workers, and lower for more abundant commodities and factors, such as water or unskilled labor.
It is troubling that there has been little growth over the past few decades in the marginal value of the labor services of less skilled workers. This is the result of technological change and increased competition in a global economy. Saez and Piketty advocate more income redistribution and higher penalties (marginal tax rates) on the most successful income earners. If the best policy advice that these prize-winning economists can offer to help struggling low wage workers is a large increase in the marginal tax rate for saving, investment and capital accumulation, it’s time for some new ideas.