The Truth About Income Inequality in America

http://www.theatlantic.com/business/archive/2012/02/the-truth-about-income-inequality-in-america/252892/

In the early 1990s, Bill Gates was asked what competitor worried him the most. Goldman Sachs, Gates answered. He explained: "Software is an IQ business. Microsoft must win the IQ war, or we won't have a future. I don't worry about Lotus or IBM, because the smartest guys would rather come to work for Microsoft. Our competitors for IQ are investment banks such as Goldman Sachs and Morgan Stanley." Gates's comment reflected a reality that has driven the formation of the new upper class: Over the last century, brains became much more valuable in the marketplace.

First, the higher-tech the economy, the more it relies on people who can improve and exploit the technology, which creates many openings for people whose main asset is their exceptional cognitive ability.

Second, the more complex business decisions become, the more businesses rely on people who can navigate through labyrinths that require advanced cognitive ability. Consider the prospects for a lawyer. A hundred years ago, lawyers mostly practiced law for individual clients and made the amounts of money that individuals could afford to pay. As the size of business deals grew and regulatory law became more complex, the need for lawyers who never see the inside of a courtroom increased. Today, if a first-rate attorney can add 10 percent to the probability of getting a favorable decision on a regulatory ruling worth hundreds of millions of dollars, he is worth his many-hundreds-of-dollars-per-hour rate.

Third, the bigger the stakes, the greater the value of marginal increments in skills. The corporation ranked 500 in 2010 was about eight times larger than the 500th-ranked corporation in 1960, in constant dollars. The value of a manager who could increase his division's profitability by 10 percent instead of 5 percent escalated accordingly.

Given that backdrop, it is no surprise that the people working in managerial occupations and the professions made a lot more money in 2010 than they had made in 1960. Real income for the bottom quartile of American families fell after 1970 (the growth of in-kind benefits and earned-income tax credits more than made up the drop in pretax cash income-- but they didn't improve their position much either). Real family income for families in the middle was flat. Just about all of the benefits of economic growth from 1970 to 2010 went to people in the upper half of the income distribution.