Presidential Bull vs. Chicago Bulls: A Lesson in Income Inequality

In the March 12, 2009, Wall Street Journal, Daniel Henninger suggests in his article, “The Obama Rosetta Stone,” that if you want to understand the presidential mind of Barack Obama, you only have to memorize figure 9 of his 2009 budget summary, entitled "A New Era Of Responsibility: Renewing America's Promise." Figure 9 – page 11 of the document – is a graph entitled “Top 1% of Earners Have Been Increasing Their Share,” and is attributed to “Piketty and Saez (2003).” According to this graph, over the period 1980 through 2006, the percentage of total income held by the top 1% has increased from 10% to 22%.  Page five of the report, in the section entitled “Inheriting a Legacy of Misplaced Priorities,” the President summarizes this trend toward greater inequality as follows: “while middle-class families have been playing by the rules, living up to their responsibilities as neighbors and citizens, those at the commanding heights of our economy have not … There is nothing wrong with making money, but there is something wrong when we allow the playing field to be so tilted so far in favor of so few … It’s a legacy of irresponsibility, and it is our duty to change it?”

But is the income inequality trend inherently “bad” or does it in fact produce a more prosperous civil society for everyone?  The facts tell a different story, and perhaps it is the President’s errant economic ideology that has given us the worst economy since the Great Depression.

First, who are "Piketty and Saez," the thought leaders behind our President’s economic ideology and the harbingers of this disturbing trend? Thomas Piketty and Emmanuel Saez are French economists. They are “rock stars” of the intellectual left.  Their specialty is “earnings inequality” and “wealth concentration.”  The President’s assumption, based on their theory, is clear: income inequality and concentration of wealth are bad, and its government’s job to see that it is properly allocated.

So let’s see if this theory is supported by actual historical fact.

In the July 10, 2012Wall Street Journal article entitled "Air Jordan and the 1%," by Matt Schoenfeld, the author states "Critics today often point to the 1950s as the last years before American society became so divided between haves and have-nots. At the end of the 1950s, America's "Gini coefficient" – the most common measure of income inequality, running from zero (least unequal) to 1 (most unequal) – was 0.37. Since then, the coefficient has risen to 0.45.  Even though income inequality has increased, in 1959, more than 20% of families fell below the poverty line. By 2010, this number had fallen to just over 13%.   Mr. Schoenfeld states, “Real per capita GDP today is 270% higher than it was in 1959. A family in the bottom fifth [20^th percentile] of the income distribution today makes the same amount in real terms as a family earning the median income in 1950 [50^th percentile]. So inequality might have increased, but so too – dramatically – has the quality of life." In 1992 only 20% of American families below the poverty line had a dishwasher, 50% had air-conditioning, and 60% owned a microwave. By 2005, these figures were 37%, 79%, and 91% respectively.  Apparently, income inequality does not translate directly into economic prosperity inequality.

To illustrate his point in terms even the most economically unsophisticated American can understand, Mr. Schoenfeld then makes his point by demonstrating how Michael Jordan’s so-called “income inequality” on the Chicago Bulls raised the overall wealth for all players. In 1986, the Bulls median player salary was $300,000. The team's lowest paid player made $135,000. Its highest-paid player made $806,000. The team’s “Gini coefficient” was 0.36 — about the same as it was for American families in 1950. After Michael Jordan joined the team in 1984, the team's popularity and revenues soared. By 1998, the year that Jordan retired, the median income was $2.3 million. The lowest paid player made $500,000. The highest-paid player (Michael Jordan) made $33 million. The “Gini coefficient” had nearly doubled to 0.67 –  50% greater than America’s current Gini coefficient. Jordan’s salary – $33 million – consumed over half the payroll. Even so, everyone else was better off. The median player in 1998 made seven times more than the median player made in 1986. The lowest paid player in 1998 had a salary quadruple that of his 1986 peer.

Detractors are quick to point out that Mr. Schoenfeld’s analogy is a poor one. They state that today's wealthy inherited their money or acquired it without any commensurate value to society. This is simply false. According to 10 Secrets that Millionaires Keep, by Daren Fonda of Smart Money, the financially successful – whom he defines as persons having a net worth of $1 million or more – are 90% more wealthy than other US households. They have annual incomes of $366,000 per year.  They are in the top 1% of taxpayers. Half of them earn their wealth from small business, one third from large corporations, and less than 3% through inheritance.  Most come from families, which would not be classified as wealthy, and have enjoyed their financial success for less than 15 years. Fifty-nine percent attended a state college or university.  They entered college with an average SAT score of 1,190. Their median grade point average in college was 2.9.  In their own words, their secrets to success were: hard work, discipline, education, and treating others with respect. They are just like everyone else, except they translated their opportunity into exceptional performance.

So here is the question.  Do you believe the Chicago Bulls or the President’s bull?