Inspired, no doubt, by the Occupy Wall Street protests, I’ve seen quite a number of posts and articles on the subject of income inequality. The first, from Barry Ritholtz, largely consists of several graphics illustrating income distribution gains from 1917 to 1981, 1982 to 2000, and 2001 to 2008. I won’t reproduce those here; go on over there and take a look at them.
As you might expect over the last 10 years the overwhelming preponderance of the gains have gone to those in the top 1% of income earners, smaller gains have gone to those in the next highest 9%, while those in the bottom 90% have seen no gains whatever. Indeed, they’ve seen declines. In the prior two periods the lowest 90% saw more gains but the top 1% have seen the greatest income gains throughout the 91 year period illustrated.
I think I interpret these charts a little differently than Barry does. What I see is an exponential curve in income growth among the highest income earners throughout the period. I don’t think it slices quite as neatly into the BR (before Reagan), AR (after Reagan), and AB (After Bush) epochs he apparently does. There may be some of that but I think I see a long term trend at work.
However, note that the incomes of all of the top 10% of income earners grew over the entire period, not just the top 1%.
The second post is a very interesting one from Mike Konczal on how the top 1% (and the top .1%) of income earners earn those incomes. Pay particular attention to the first two tables (Mike hot-links the first one which I think is rude). I won’t reproduce them here but I will put a few numbers behind them: the top .1% of income earners comprise about 140,000 people and the top 1% about 1.4 million people.
In 2008 the six categories with the largest number of individuals among the top .1% of earners were non-financial executives, managers, and supervisors (40.8%), financial professionals including management (18.4%), the idle or deceased rich (6.3%), lawyers (6.2%), real estate (4.7%—I expect the numbers for 2011 would be somewhat different), and medical professionals.
In 2005 the six categories with the largest number of individuals among the top 1% of earners were non-financial executives, managers, and supervisors (31%), medical professionals (15.7%), financial professionals including management (13.9%), lawyers (8.4%), non-financial computer, math, technical, and engineering professionals (4.6%), and the idle rich or deceased (4.3%).
Let’s put some more numbers behind those: the top 1% of income earners make about $380,000 per year while the top .1% make a couple of mill.
One last note before I launch into the things that concern me: quite a number of the lawyers who are among the top 1% or top .1% of income earners are, basically, camp followers of the financial sector and there has been a bloodbath among them over the last five years. I expect lawyers’ position in these rolls to change pretty dramatically. Some, too, are the Michael Jordans and Bill Gateses of the legal profession. They do make a lot of money but there really aren’t very many of them.
Okay, here goes. Here’s what worries me about this:
- Too many of those in in the top .1% but, particularly, the top 1% of income earners are rent-seekers, clients of the government. The situation is even worse for the top 10%. A pair of GS-10s working in DC are in the top 10% of income earners (FBI special agents start as GS-10s).
- We’ve redoubled our efforts at bailing out and subsidizing the top .1% and the top 1% over the last four years. What would these tables look like without all of the subsidies? There’s no way to tell.
- We’ve been so afraid of destabilizing the financial sector that they’ve effectively been indemnified not only against financial loss but against civil and criminal penalities. That’s infuriating not to mention counter-productive.
- The categories that the Occupy Wall Street protesters have been dividing the country into, the top 1%/the bottom 99%, are wrong. We should be contrasting the top 10% with the bottom 90%.
- I think that the bottom 90%’s problem is a combination of globalization, massive immigration of low-skilled and semi-skilled workers from Mexico, and the healthcare system. Most of the income gains the bottom 90% might have seen have gone to healthcare spending.
- I don’t see any plans on the table that would do much for the bottom 90%.
- I do see plans on the table under which the top 1% would subsidize the next 9%. I don’t think that solves whatever problem of income inequality that we have.
- The trends have been in place for a very long time.
If “most of the income gains the bottom 90% might have seen [has] gone to healthcare spending” they’ve seen them, just not in the form of taxable cash income. To get a better metric would require including the value of employee benefits received in the income stats. IOW, if the value of your employer-paid health benefits has gone up 100%, that’s part of the overall compensation package and the stats should include it for any real assessment of income.
What you noticed about lawyers is also true of other professionals to some extent. Staying in the upper tiers is a lot harder than just getting there once.
Regarding immigration of low skilled workers, while that might be a problem I don’t think it is the one most people think it is. Immigration, for the immigrants, is a welfare enhancing change. That is, for the people in this category they are better off even if they are in the bottom 90% or even the bottom 50% of the income distribution.
Regarding health care, good freaking question. Note that all this excludes benefits (it actually helps to, you know, look at the fvcking source data, not that I’d expect that of Ritholtz). So in a sense the statistics are bullshinto. If an increasing portion of the bottom 90%’s income is going to health care over time, then by excluding it you are biasing their income statistics (broadly defined) downwards.
Globalization, not a whole lot can be done here if that is indeed a factor. Trying to reduce trade, i.e. protectionism, is probably exactly the wrong way to go about addressing the issue. If one can find policies that enhance worker productivity and increase the competitiveness of labor markets that might work better. What are those policies? I don’t know.
You know it is hard when reading stuff like this to not write something like, “Well, isn’t this the liberal utopia?” After all, they like expanding the discretionary power of government and haven’t seen a problem where they don’t think government shouldn’t be the first solution. If I were a big business leader with lawyers on K Street and I had the names of a handful of Senators and Congressmen in my Rolodex I’d be damned inclined to note that some regulations create, to varying degrees, barriers to entry. I’d also realize that barriers to entry would increase my ability to set prices and increase profits. Rent seeking does not have to be so obvious and simple as cash transfers or super low interest rate loans or bailouts. Simply keeping potential competitors out of my market would be just fine, thank you very much.
But to be fair, Republicans have been pretty keen on expanding the power, scope and influence of government. We get TARP from them, and bailouts for GM and the big banks probably would have happened under McCain as well.
Don’t you get it you iiiidiot? If we didn’t indemnify them they’d take down the entire global economy and then where would I get my internet porn fix from? Well? Of course we had to bailout them out, ensure that the losses are public while profits are private. (How much of that graph is due that last sentence? Barry? Barry? Barry Ritholtz please pick up the white courtesy phone.)
Yes, of course. The peasants are revolting, don’t you see.
That is Bush’s fault too.
If an increasing portion of the bottom 90%’s income is going to health care over time, then by excluding it you are biasing their income statistics (broadly defined) downwards.
But are they GETTING more healthcare for the incresed spending? If they’re not getting more healthcare* at the same pace their spend/benefit is going up, then they’re losing ground. What’s the inflation rate on HC, something like 9%? (I’ve forgotten all that crap now that I’m not immersed in it every day.) Are they really getting more HC at that pace on a yearly basis?
As it stands all this spending is benefitting the HC and Insurance industries more than it is the bottom 90%.
* Actually, are they getting more HEALTH for their increased spend, and at the same pace their ‘benefits’ are going up?
I should clarify – getting more healthcare can mean getting an CT scan instead of a regular x-ray. Have you really got more from the one than the other? Depends on the situation, but you don’t always get improved results. Either way it counts as more healthcare spending, but doesn’t automatically translate to more actual health.
IDK, but that is irrelevant, the metric that people have chosen is dollars, not quantity.
IDK, but that is irrelevant, the metric that people have chosen is dollars, not quantity.
And that’s why looking at just the actual DOLLARS paid to someone is the correct metric. Money is fungible, health insurance isn’t. Try choosing to NOT get HC from your employer and ask for a $5,000* raise. Ain’t gonna happen.
* Another number pulled from my hat. I don’t remember what our (their) average spend per EE was anymore, but that is in the correct range.
But a certain chunk of the dollars they otherwise would be paid is given to the consumer in the form of “health care dollars”. Not counting that dollar value is misleading, especially for people at the lower end of the income distribution.
Or to put it differently, without the health care benefit those dollars, with a competitive labor market would show up in the workers pay check. So not counting them is definitely wrong and biases the results since for the bottom 90% of the income distribution that extra money would be a significantly larger chunk of their pay check.
Oh, and lastly, the worker would take home significantly less dollars in terms of after tax dollars. Health care benefits are an untaxed benefit. As such, having a chunk of their pay diverted into health care allows the workers to enjoy an even larger amount of health care than they otherwise would. Considering the rapid rise in health care prices is probably a later 20th/early 21st century thing that might go someways towards resolving this inequality.
And to be clear, I think inequality is a problem. Not necessarily because it has to be a case of the rich getting rich of the poor (although that might be the case, but I’d want some a bit more concrete, this data goes nowhere near showing causality), but because of the way our government institutions have evolved over time those with lots of money will have more access to those with the power to set policy. That is where you could get the rich getting rich off the poor. The liberal roosters in terms of expanding the power of government coming home to roost. Yeah sure, its sounds great giving your guy more power, but whoops the other side wins now and guess what they get to use all that power too. And to try and get back into power you need money…and to get that money you are probably going to be making some deals that will benefit…wait for it…wait for it…the top 1% of the income distribution.
““Well, isn’t this the liberal utopia?†After all, they like expanding the discretionary power of government and haven’t seen a problem where they don’t think government shouldn’t be the first solution. ”
Not really. Who wants to cut taxes on that group? Who wants to tax them more heavily? I have no idea what liberal utopia would be, but I am pretty sure it is not having all of the income going to the top 1%. That would seem to fit better with the right, judged by their policies which seem to always start with tax cuts at the top (see Cain’s plan).
” The liberal roosters in terms of expanding the power of government coming home to roost. Yeah sure, its sounds great giving your guy more power, but whoops the other side wins now and guess what they get to use all that power too.”
Make government really small, say as small as it was in the 1920s. We would likely have at least as much inequality as then, about the same as now. Of course, that was addressed in the 30s. Now, it will likely go unabated. Is a smaller government less easy to influence? Wouldnt you expect a 1% controlling growing amounts of the economy to rule unopposed? Wouldnt a government unable to regulate because it is smaller, be (functionally) the same as we had in the 2000s? I would rather concentrate on how government functions rather than absolute size.
Steve
What do tax rates have to do with income inequality? Since when can taxes keep all the income from going to the top 1%?
Not to mention that the extra tax money will probably help middle and upper income people more (in dollar terms) than the poor, or they will avoid much of the tax thanks to loopholes.
Secondly, there is a paradox in modern liberalism which is well described here and here:
Liberals do want to expand the power of government – just look at their policies. The problem is that government is a captive and expecting a captive to keep control of his jailer is wishful thinking at best.
steve, go back and take a look at Ritholtz’s graph. The period it illustrates saw marginal tax rates both go up and down. Neither changed the long term trend for more income going to upper brackets.
I’m not certain what the explanation for that might be. The one I’m trying out is that fiscal policy redistributes income within the brackets rather than among them. The more successful you are at rent-seeking, the more you’re likely to benefit by fiscal policy.
Bzzzttt!!!
Look at the data, you are wrong. Unless you think the difference is all made up via health care benefits.
Here this might help. Of course, it isn’t a utopia, but isn’t that what the pea brained liberal types say when they respond to Libertarians?
Derp…
No, a smaller government has less influence in regards to reallocating resources and granting rents to special interests.
No, because it wont have the regulatory power. How much of our current mess is due to regulations. I’m not talking low growth, but rent seeking, and entirely different animal. I could probably lead to lower growth and possibly higher unemployment, but the mechanism is different than say regime uncertainty. Rent seeking is about gaining market power and increased market power for any firm moves them closer to being a monopoly, and monopolies, relative to competitive firms produce less and higher fewer workers.
Too right. Look at all this hurf and blurf over the Buffet rule. Duuuhhhh, there you go influencing government. We’ll treat certain types of income in a way so that they get taxed at a lower rate than they otherwise would.
I agree. How many times have I written here and at OTB that the incestuous relationship between Wall Street and Washington is a significant part of the problem. So long as you have people moving between those two places you will have problems, big ones that will likely get bigger as time goes by. The best course is to stop that relationship. So how do you do it? Tell people who have held office they can never work on Wall Street or even other large corporations? Do we create a permanent class of politicians and policy makers? That strikes me as going along way towards Statism. I think the better solution is to make hiring of Washington insiders a whole lot less appealing for Wall Street. I’m open to other suggestions.
“Look at the data, you are wrong. Unless you think the difference is all made up via health care benefits.”
Income inequality is about the same now as in the 20s.
Look at the data, you are wrong. Unless you think the difference is all made up via health care benefits.
Steve
steve,
I have. According to Saez’s data in the 1920’s the sum of the percentages for each group, top 10%, 5% and 1% exceeds the sum of the percentages from 1999-2008. This means inequality is higher now than it was back in the 1920’s. And if you look at the very super rich, the top 0.01% it is even more stark. The sum or percentages from 1920-1929 is 30.39, whereas in 1999-2008 the sum is 45.62. That means that the group of people had significantly greater wealth. For 0.1% the sums are 78.98 and 98.79 respectively. If we were to graph out the Lorenz curve the the top end of the curve would be fatter for 1999-2008 than for the 1920’s.
McArdle has charts on this. It does look like since the recession, the top .1% and the top 1 % are retreating to income shares comparable to the 80s.
Let’s try a link.
Woo Hoo!
That’s very interesting, PD. If that can be believed not only are the income shares comparable to the 80s, they’re comparable to late 1930s and early 1940s, the Golden Age of the New Deal.