Steven Kaplan on the Inequality and the Top 1%

Episode Summary

Executive Summary: Russ Roberts and Stephen Kaplan examine the rise of top incomes in the U.S., distinguishing snapshot income shares from lifetime mobility. They discuss how the top 1% and especially the top 0.1% captured a growing share of pre-tax income, what income levels define these groups, and Kaplan’s research on whether Wall Street, CEOs, or other sectors drove the increase. The conversation also turns to financial crises, leverage, bailouts, and whether moral hazard explains repeated market failures.

Main Topics: Measuring the rise of top incomes (Priority: 5/5): Roberts and Kaplan clarify that inequality data usually compare different people at different points in time, not the same individuals over time. They focus on adjusted gross income shares for the top 1% and 0.1%. Income thresholds for the super rich (Priority: 4/5): The discussion estimates what annual income is required to enter the top 1% and top 0.1%, stressing that these are income—not wealth—thresholds and vary by year. Who makes up the top incomes? (Priority: 5/5): Kaplan describes his paper with Joshua Rau, which seeks to identify the occupational and industry composition of the top income groups rather than assuming the gains come mainly from CEOs. Wall Street, leverage, and financial crises (Priority: 5/5): The conversation explores whether the 2008 crisis reflected moral hazard from bailouts or broader recurring patterns of leverage, overconfidence, and innovation gone wrong. Private equity vs. mortgage finance (Priority: 4/5): Roberts challenges Kaplan’s interpretation by contrasting the relative resilience of leveraged loan markets with the collapse of mortgage-backed securities, probing whether bailouts changed incentives unevenly. Policy implications for preventing future crises (Priority: 4/5): Both agree that higher capital requirements are likely part of the answer, even if they disagree on whether bailout expectations were the main cause of the crisis.

Key Arguments: Top income shares rose dramatically over recent decades: the top 1% went from under 10% of AGI in the late 1970s/early 1980s to 23.5% in 2007. The very top matters disproportionately: the top 0.1% took roughly half of the top 1% income share, and its share increased from 3.5% in 1980 to about 12% in 2007. Income-share comparisons are snapshots and do not necessarily show that the same individuals became much richer over time. The term "top 1%" refers to adjusted gross income, which includes wages, capital gains, options, and partnership income, but excludes some items like municipal bond interest. Kaplan argues that narratives blaming only CEOs for rising inequality are too narrow; the composition of top incomes is broader and must be measured empirically. Financial crises recur because of recurring human errors—overconfidence, leverage, and misjudgment—not just because of modern bailout expectations. Roberts argues that bailouts may have increased moral hazard, while Kaplan thinks that effect is not large enough to explain the crisis and that similar failures happened long before modern bailouts. Both imply that stronger capital requirements would reduce the chance of future systemic failures.

Data Points: Top 1% share of adjusted gross income (late 1970s/early 1980s): under 10% - Benchmark for pre-tax income concentration in the U.S. before the rise in top incomes. Top 1% share of adjusted gross income (2007 peak): 23.5% - Highest recent pre-tax income share discussed; second-highest on record. Top 1% share of adjusted gross income (1928 peak): 23.9% - Historical high point in the U.S. pre-tax income share series. Top 1% share of adjusted gross income (2009): 17.6% - Post-crisis decline in top income share after the 2007 peak. Top 1% income threshold (today-ish, varying by year): about $300,000 to $400,000 - Approximate annual adjusted gross income needed to enter the top 1%. Top 1% income threshold (2007): over $400,000 - Threshold in the peak year before the recession. Top 1% income threshold (2009): lower end of $300,000 - Threshold fell during the recession when top incomes dropped. Top 0.1% income threshold (2009): about $1.4 million - Approximate annual adjusted gross income needed to enter the top 0.1%. Top 0.1% income threshold (2007): over $2 million - Threshold in the peak income year. Top 1% share (2000): 21.5% - Used as a reference point near the end of the Clinton administration. Top 0.1% share (2000): about 11% - Roughly half of the top 1% share went to the top 0.1%. Top 1% share (1980): 10% - Illustrates the long-run rise in top income concentration. Top 0.1% share (1980): 3.5% - Shows that the very top captured a much smaller share in earlier decades. Top 1% share (2007): 23.5% - Compared with top 0.1% share to show skew within the top 1%. Top 0.1% share (2007): 12% - About half of the top 1% share accrued to the top 0.1%. Top 1% share (2009): 17.6% - Lower than in any year of Clinton’s second term, according to Kaplan.

Pivotal Quotes: "wealth is not a pizza" — P.J. O'Rourke: Roberts uses this to emphasize that a bigger share for one group does not automatically mean less for everyone else. "That seems to be about the – I'm looking at the pattern here. Is that true in 2007?" — Russ Roberts: Roberts highlights that the top 0.1% appears to account for about half of top 1% income, suggesting the gains are concentrated at the very top. "I just don't think it's big enough." — Stephen Kaplan: Kaplan’s response to the claim that bailout expectations alone explain the crisis and the rise in financial risk-taking.

Implications: The transcript suggests inequality debates should distinguish snapshot income shares from lifetime mobility and focus on the very top of the distribution. For policy, crisis prevention likely requires stronger capital and risk controls, not just blame on CEOs or bailouts.