The First of Many Posts on Inequality

November 29th, 2011 at 4:43 pm

I’m compelled to write a bunch about inequality.

What are the facts of the case (my CBPP colleagues are doing great stuff on this that I want to promote)?

Why has it gone up so much?

Why does it matter?

Where is it headed?

Why so much interest in it right now?

Is it a political force?

So let’s start with facts of the case.

If you want to quickly and efficiently get up to speed on the income inequality story in the US—and who doesn’t?—read this from my CBPP colleagues.  It takes you pretty far into the weeds on data sources and the like, but this is one of those economic issues where the sources matter a great deal.  Series that fail to include realized capital gains, for example, will miss important dynamics going on in the upper tail of the income scale.

Here’s their summary of the broad trends:

  • The years from the end of World War II into the 1970s were ones of substantial economic growth and broadly shared prosperity.
    • Incomes grew rapidly and at roughly the same rate up and down the income ladder, roughly doubling in inflation-adjusted terms between the late 1940s and early 1970s.
    • The income gap between those high up the income ladder and those on the middle and lower rungs — while substantial — did not change much during this period.
  • Beginning in the 1970s, economic growth slowed and the income gap widened.
    • Income growth for households in the middle and lower parts of the distribution slowed sharply, while incomes at the top continued to grow strongly.
    • The concentration of income at the very top of the distribution rose to levels last seen more than 80 years ago (during the “Roaring Twenties”).
  • Wealth (the value of a household’s property and financial assets net of the value of its debts) is much more highly concentrated than income, although the wealth data do not show a dramatic increase in concentration at the very top the way the income data do.

This picture from recent CBO data, which are among the best for understanding the trend in income inequality over the past few decades, is quite revealing of where the Occupy folks are coming from with the 99/1 framing.

One thing to note here is the large decline in gains to the top 1% after the dot.com bust.  That’s a function of the decline in asset values which led to large capital losses for high-end households.  The CBO data end in 2007 but you can be sure the top took another hit with the bursting of the housing bubble and the ensuing financial meltdown.

In fact, IRS data, which go through 2009, show the share of adjusted gross income going to the top 1% to have fallen sharply in 2008 and 2009, from around 23% in 2007 to 17% in 2009.

But that’s expected.  The question is whether it’s cyclical or structural and the answer is that it’s almost certainly the former.  Note the huge bounce back in the growth of top incomes once the economy recovered.  Since the underlying forces generating the increasingly unequal distribution of growth remained in place, there was no reason to expect a structural downshift (more on those forces in later posts, but here’s an earlier post that gets into that material).

What does the future hold in this regard?  Will inequality, as measured by the share going to the top 1%, start climbing again soon?

I’m quite certain it will as the forces stoking its growth remain in place.  One way to test this hypothesis is to look at the correlation between the growth at the top of the income scale and corporate profits, for which we have data through 2010, and which have fully regained their stellar prerecession peak.

The figure shows the result of a simple model regressing the CBO top 1% series on corporate profits (as a share of income) and a time trend (other than the time trend, I use the changes in the variables).  It’s a simplistic model–nothing you’d want to take home to your parents–just “blogometrics.”  But what we’re looking for here is whether the forecasted series (in red) ticks up in 2010…and there it is.

The forces driving inequality in America remain, unfortunately, alive and well.

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8 comments in reply to "The First of Many Posts on Inequality"

  1. Scott Supak says:

    I would love to see productivity on that chart, as it seems wages departed from productivity for everyone but the rich, starting with Reagan.


  2. readerOfTeaLeaves says:

    I’m not able to locate that fabulous, fantastic graph that shows the explosion of government debt showing the unpaid for wars, the TARP bailout (in light blue, IIRC), and other sources of debt from 1999 forward overlaid onto parts of the graph shown here.

    Part of my beef is this: who got all that TARP money?!
    Well, the financial sector did. And where do we see the 1% income spike? In part, it’s in the financial sector.
    IMVHO, what part of this graph reveals is the financialization of the US economy. How much of that 277% income increase was generated partly from TARP payouts for CDSs on CDOs?

    As for inequality, people seem to think that post-1980s computerization is just industrialization with a twist, and that capital functions the very same way. But IMVHO, this is a deep misunderstanding.

    A steam engine was not capable of replicating itself and making another new steam engine; but copy-paste creates a whole new kind of economic model. Yet government, in its knuckleheadedness, treats digital wealth as if it were the old industrial ‘capital’ used to create steel mills and railroads. In fact, digital capital does **not** work this way — yet we let the 1% get all the capital gains, as if we were back in the 1880s. Sheesh!

    I’d really be interested in the overlay and interplay between the 1% gains and TARP bailouts, along with a better teasing out of the impact of computerization post 1980s, which is where we see the inequalities really start to accelerate.


    • jmmx says:

      @readerof…
      Look – I do not like the financial bailout any more than you do. The question unfortunately, is not whether I LIKE it or not, but whether we had any alternative or not.

      Personally (as a middle class guy with a few dollars in stocks) I believe that both Bush and Obama saw that they had no choice at all but to do the bailout to avert a depression that would have at least equaled that of the 30s. The banks had indeed become too big to fail, and if we had not bailed them out then we would be in much much worse shape than we are right now.

      I should like to point out that this is (in large part) a direct result of the Gramm–Leach–Bliley Act that repealed the separation of commercial and investment banking provisions of the Glass–Steagall Act of 1933. (Please note that all the sponsors and promoters of this bill were Republicans) During debate in the House of Representatives, Rep. John Dingell (Democrat of Michigan) argued that the bill would result in banks becoming “too big to fail.” Dingell further argued that this would necessarily result in a bailout by the Federal Government.
      See: http://youtu.be/y2RzRv8yQXQ

      Just as in the Savings & Loan bailout was enabled by mindless deregulation during the Reagan administration, the repeal of the Glass-Steagle provisions were key to the current recession.

      To my mind, the Tea Party and neo-concervative folks just want to return to more of the wild-west uber-deregulation that
      has caused this recession.


  3. Tyler says:

    Inequality has arisen due to the diminishment of unions.


  4. readerOfTeaLeaves says:

    Just landed on a link (via Ritholtz’s Big Picture) that speaks very much to this post.

    http://news.yahoo.com/top-0-1-nation-earn-half-capital-gains-172647859.html

    There is some good data in the article, and this is one of the money quotes: “Income and wealth disparities become even more absurd if we look at the top 0.1% of the nation’s earners– rather than the more common 1%. The top 0.1%– about 315,000 individuals out of 315 million– are making about half of all capital gains on the sale of shares or property after 1 year; and these capital gains make up 60% of the income made by the Forbes 400.” [article is dated 21 Nov 2011]

    On what basis, in a world of copy-paste duplication, does ‘capital gains’ get such tender treatment in the tax code? Ritholtz has a blog post pointing out that in 1997, one dollar invested in Amazon would be $140 today. And $1 in Webvan would be worth $0 today. I can say with relative certainty that the people making $10/hr (or whatever) working in Amazon’s warehouse are **not** the ones benefitting from that stock price. And I’m pretty sure they are *not* unionized.

    This whole capital gains tax status is also messing up business structures, as people would rather goose their stock prices than focus on long term success in the business.


  5. Matt says:

    The “share of income to 1%” chart is misleading as it does not depict a steady cohort over time, as in you are not tracking the income of the top 1% of the population in 1979 over time.

    Doing that is important because of the tremendous diffusion across these categories. Llyod Blankfein, Joh Paulson, and George Soros, Bill Gates, Steve Jobs etc were not in the 1% bucket in 1979. The fact that they got there speaks more to the American system rather than the fact that the share of the 1% is rising. As long as the 1% is not a static entity, and there is constant churn in that population, the country is not becoming a plutocracy. It is a vibrant economy instead.

    That is something to be proud of, not beaten down.


    • Judd says:

      Several other articles here and elsewhere (e.g. Brad Delong’s site) have covered the relative mobility in earnings in the US vs OECD.

      It is not what you are hoping.

      What we have is some from the upper 5% moving into the upper 1% but very few from the 85% can make it up to even the 5%.

      We should not be proud of this; we should fix it.


  6. On Inequality: Why Now? | Jared Bernstein | On the Economy says:

    [...] [BTW, note the dip at the end of the series—2008 (these data are only available with a lag).  That’s a cyclical dip, a function of realized capital losses from when the bubble burst, just like what happened in the last downturn.  And as you can see, once the economy picked up again, inequality regained its momentum.  I predict the same pattern in this expansion—see figure on the bottom of this post.] [...]


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