Gerard Minack: Us and them

Gerard Minack is up and running with his new direct-to-client business and will be posting with MB from from time-to time. Here is his inaugural effort.

Rising political polarisation in the US has gone hand-in-hand with rising income inequality, falling top-end tax rates, lower taxes on business, rising leverage and higher asset prices. These trends may be coincidental, but they seem to reinforce each other.  The medium-term risk is that some of these trends reverse, as occurred after the 1920s.

Congressional political polarisation and income inequality in the US are at multi-decade extremes (Exhibit 1).  The polity is split; incomes are unequal.


The rise in polarisation partly reflects electoral gerrymandering that has sharply reduced the number of contestable seats (Exhibit 2).  Only 20% of House of Representatives seats would change hands on a 5% swing.  This increases the centrifugal influence of the party members who dominate the increasingly-decisive party primary elections.


However, rising political polarisation pre-dates the decline in contestable seats: it started as incomes became more unequal.  Inequality has not risen because the rich got richer faster than the poor.  It increased because the income gains of the past 30 years have gone to the top 1%.  Average income for the bottom 99% is now unchanged in real terms over the past 40 years (Exhibit 3).  The rising tide did not lift all the boats: it floated a few yachts.


In 2012 the highest-paid 1% earned 21½% of total income, according to academic Emmanuel Saez (  This is the highest share since the 1920s.  The lift in top-end income mainly reflected a rise in business income and salary payments.  Exhibit 4 shows the source of income for the highest paid 0.1%, as a percentage of total US income.  The income share of the highest paid did not increase just because capital has done better than labour: it also reflects the increase in the share of salaries going to the highest paid.


Several factors contributed to wage inequality.  The increased supply of unskilled (Asian) labour damped low-skilled wages in developed economies (but increased wages in emerging economies).  Rising inequality was also correlated with the rise in the relative pay of workers in finance (Exhibit 5).


The rise in financial pay also was associated with the rise in economy-wide leverage (Exhibit 6).  This was similar to the 1920s.  Both periods saw important technological innovations and large credit booms.  The technological improvements in the 1920s were far more important than those of the past decade or two, but the modern credit boom far out-stretched its 1920s predecessor.


The rise in inequality now – as in the 1920s – has also been associated with a significant decline in tax rates on high incomes.  Exhibit 7 shows the share of income going to the top 10%, and the top statutory income tax rate (inverted, so the line goes up as the rate goes down).  The highest marginal rate was last below 40% in the 1920s.  (Note one difference, however:  the top rate now cuts in at an income of just under $400,000.  In 1921 the top rate cut in at an income of over $13,000,000 in today’s prices.)


The increase in capital income has been assisted by the rise in profits as a share of GDP.  This rise reflects rising pre-tax profits and falling average effective tax rate paid by business (Exhibit 8).


All these trends were favourable the owners of financial investments and for people working in the investment industry.  Neither has had it this good since the 1920s.  This cycle, like the 1920s, could have ended in a depression.  Instead, aggressive policy response of central banks seems to have added another leg to the cycle.  However, pushing these trends to historical extremes may start to cause problems for investors, as illustrated by the debt ceiling imbroglio.  More to the point, it seems plausible that these trends will reverse, at some stage, to the detriment of financial assets.

David Llewellyn-Smith
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  1. No argument with any of these charts or the macro view. My thoughts on these issues are influenced by my last 2 months in the US. Considerable initial travel in the north east had me concerned about the project started in Houston during my last visit earlier this year.

    Have had almost a month in Houston. Blown away by the contrast in activity and focus. Debt ceiling in DC…..not our problem, we’re too busy getting business happening. Disparity in wealth – definitely, just look at the Hispanic gardeners. That said, I have heard the same message everywhere – you can get good jobs in Houston and affordable housing. ‘It’s a great place to do business’.

    You can make a living and, importantly, a better quality living than the same person could get elsewhere.

    My take in this and the data: national stats can obscure regional realities. I think there is a structural change occurring in the US economy and the south, particularly Texas will continue to grow despite the stupidities in DC and global disruptions. It is well on the way to becoming [relatively] more prosperous.

    Disparities – undoubtedly. But it is a very rapidly changing scenario. Opportunity exists and some are prepared to move to take it up.

    My project? Is bedding down well and am actively looking for another [bigger] one.

    • Like you said, disparities exist though it depends on the industry I guess. At least in that regard, Houston has wonderfully diverse job market.

      My wife travels there regularly for oil/gas work and offers the same anecdotes. People get stuff done, they work hard but play hard too.

      Hoping to visit along with in July next year and replace the photos with experiences.

    • R2M,

      This is off-topic, but HnH turned the comments off from yesterday’s link, so I cannot go back there.

      Thank you for the link you had provided. The measurements of surface salinity are a clever way of estimating rainfalls on the ocean. So the turnover cycle of evaporation and precipitation accelerates with warming – which makes sense (chemical reactions proceed faster with increasing temperature after all). Presumably, this reduced surface salinity would lead to further increased evaporation and precipitation, i.e., positive feedback?

      But how does this lead to less precipitation in dry regions? I would have thought that there would be more moisture in dry regions as well as in wet regions after warming, no? The atmosphere is connected after all?

      Look at it this way; the atmosphere above the ocean is the wettest part. And there will be more precipitation there. The atmosphere above a landmass must be drier than that above the ocean next to it. But, for the number of floods on the landmass to increase at all, it still must be wetter than before. Even if you subdivide the landmass to finer sections from the coastal regions to the inland regions, should not this still hold true? I mean, each region will be drier than the next one that is closer to the ocean but still wetter than before (i.e., before warming)?

      I believe my thinking above is logical (if you disagree, please spell out which part is faulty).

      Note; even if you cannot provide explanation to my question above, if your answer is “Because the data said so”, I will accept that. Since you appear to know a lot about this subject, perhaps you can pinpoint the relevant reading materials?


        This is where vegetation matters. Both the type of vegetation, how much and where, since it affects cloud formation and the water cycle in general.

        Also yes, the atmosphere is connected but it can be significantly variable between regions in moisture, pressure, temperature, wind speed etc. If it weren’t, weather patterns would be far far easier to predict.

        So it doesn’t hold true that there will be logical graduations across land mass regions.

      • @velocity

        Look, I am not disputing that vegetation, etc., will alter climate patterns in general (or the effects of deforestation).

        It is unclear to me as to why or how the increased moisture in the atmosphere overall leads to reduced moisture only in dry regions but not in wet regions. Take a desert for example as a limiting case of a dry region. Can it get even drier with warming from the already low base (for precipitation)? Should not there be more driving force for the excess moisture in the wet region to flow into the dry region, since the concentration gradient is greater than before?

        But, as I stated, data trump logic in science. So, I will accept if the data state that wet regions get wetter and dry regions get drier with warming.

  2. “…it seems plausible that these trends will reverse, at some stage, to the detriment of financial assets.”

    The analysis should go into this dangling idea. Maybe a part 2.

    Good that Minack is contributing – always rate his work highly.

  3. “Gerard Minack is up and running with his new direct-to-client business and will be posting with MB from from time-to time”


    I learned a lot from Gerard over the years (I have no formal economics education and was not interested in / knew next to nothing about economics before the GFC). One thing I particularly like about Gerard is that his posts are based on history. It would be great if he could keep posting on the MB site from time to time in future!

    Is he going to answer our questions at all?

  4. Any discussion which lauds marginal US tax rates in the 1950s as being ‘progressive’ and ignores what constituted taxable income during that that time is either lying through omission or is being willfully dishonest.

    “In 1958, the top 3% of taxpayers earned 14.7% of all adjusted gross income and paid 29.2% of all federal income taxes. In 2010, the top 3% earned 27.2% of adjusted gross income and their share of all federal taxes rose proportionally, to 51%.”

    “In contrast, the share of taxes paid by the bottom two-thirds of taxpayers has fallen dramatically over the same period. In 1958, these Americans accounted for 41.3% of adjusted gross income and paid 29% of all federal taxes. By 2010, their share of adjusted gross income had fallen to 22.5%. But their share of taxes paid fell far more dramatically—to 6.7%. The 77% decline represents the single biggest difference in the way the tax burden is shared in this country since the late 1950s.”

    “The tax code of the 1950s allowed upper-income Americans to take exemptions and deductions that are unheard of today. Tax shelters were widespread, and not just for the superrich. The working wealthy—including doctors, lawyers, business owners and executives—were versed in the art of creating losses to lower their tax exposure.

    For instance, a doctor who earned $50,000 through his medical practice could reduce his taxable income to zero with $50,000 in paper losses or depreciation from property he owned through a real-estate investment partnership. Huge numbers of professionals signed up for all kinds of money-losing schemes. Today, a corresponding doctor earning $500,000 can deduct a maximum of $3,000 from his taxable income, no matter how large the loss.”

  5. General Disarray

    Excellent post.

    It’s really hard to see how the current path can be sustained for much longer. But it’s also hard to see any politician with the guts to try and address these issues being around very long – they would be crushed by interest groups and associated shills in the media.