I’m Gettin’ Money

Throughout the financial crisis, I’ve been dimly trying to remember something I read on Tyler Cowen’s blog a long time ago. Today, Paul Krugman shows off his Nobel Prize skillz by finding the post in question:

I also found myself thinking about the Kaplan-Rauh paper finding that Wall Street was largely responsible for the surge in very high incomes, which was widely taken as evidence that the new rich were really earning their money (though to be fair Tyler Cowen didn’t say that.)

Time for some reevaluation, don’t you think?

Here’s a link to the paper itself. The abstract:

We consider how much of the top end of the income distribution can be attributed to four sectors — top executives of non-financial firms (Main Street); financial service sector employees from investment banks, hedge funds, private equity funds, and mutual funds (Wall Street); corporate lawyers; and professional athletes and celebrities. Non-financial public company CEOs and top executives do not represent more than 6.5% of any of the top AGI brackets (the top 0.1%, 0.01%, 0.001%, and 0.0001%). Individuals in the Wall Street category comprise at least as high a percentage of the top AGI brackets as non-financial executives of public companies. While the representation of top executives in the top AGI brackets has increased from 1994 to 2004, the representation of Wall Street has likely increased even more. While the groups we study represent a substantial portion of the top income groups, they miss a large number of high-earning individuals. We conclude by considering how our results inform different explanations for the increased skewness at the top end of the distribution. We argue the evidence is most consistent with theories of superstars, skill biased technological change, greater scale and their interaction.

In retrospect, it seems that the “Wall Street” proportion of this wasn’t much more than people taking a general upward trajectory in the market and adding lots of leverage to generate extraordinary returns. And the Wall Street portion is extremely large relative to the Main Street portion.