Recent Patterns of Income Inequality

August 27, 2005

Guest post by Ed Stephan

Most of post-WWII politics in this country has operated on the assumption that the United States is committed to the well-being of its solid middle-class with its not-too-surprisingly middle-of-the-road politics.

Americans don’t like to talk in the class-structural terms familiar to most Europeans and much of the rest of the world. We’re neither Marxist (as many European left-wing parties are ideologically) nor elitist (we lack the aristocracies and established churches associated that end of the scale, too). Proud of striving to be a truly “classless” society, we characterize extremist points of view as favoring “class warfare” (which Martha Stewart would call “a bad thing”).

I had hoped to elaborate on this a good deal more but (1) I’m hardly expert (probably not even qualified) in economic sociology and (2) I have simply run out of time this week. All I managed to do was download some historical data for a graph which might provide a basis for discussion here.

The 1947-2001 data are from the U.S. Census Bureau, augmented by two additional years. The graph shows the percent of family incomes taken in by each fifth of families, from the lowest fifth to the highest. As you can see, the most significant change is for the wealthiest 20%. All through the 1950s, ’60s and ’70s they took in slightly more than 40% of the income. Then with the presidency of Ronald Reagan — and almost continuously ever since — they have increased their take. Their gains have come from losses spread almost evenly across the lower four groups.

Since Reagan, the Republican Party has pursued an unalloyed policy of reallocating income to the rich and very rich, while shifting risk to the middle class and the poor. Everything they do, and propose to do, has that aim, directly or indirectly. Reagan enacted the largest tax cuts, followed by the largest tax increase in history, for example; care to guess who got the cuts and who got the increase? This is not rocket science, and you don’t need a degree in economic sociology to understand it.

What is curious is the reluctance of either Democratic politicians or liberal pundits to speak plainly about it.

  • Interesting.

    I would have thought the bottom segments would have seen increases during the Clinton era, but I guess not.

  • “Class warfare,” Bruce Wilder. They slap
    us down with that every time, and we bow
    meekly and eat cake.

    Ed, what’s the definition of “income”
    here? Does it include or exclude
    unrealized capital gains?

  • Racerx: the “bottom” did see gains in the late Clinton years: gains in real income — the only time since Nixon, that the median wage rose significantly. But, the graph depicts shares — how the pie is sliced, not the size of the pie.

    Clinton did, soon after taking office, partially reverse some tax cuts for the rich — that might be reflected in the chart.

    The most curious in the chart, to me, is the bump, circa 1990-94. What was that about?

  • I highly recommend “Sleepwalking Through History”, an excellent overview of the Reagan years, and their origins in the Goldwater movement of the 60’s, from a political, sociological, and economic perspective.

  • Hark,

    I can’t answer your question without doing more digging. Worth checking out though. The several footnotes state “Data reflect implementation of expanded income questions to show wage and salary, farm self-employment, nonfarm self-employment, and all other nonearned income separately.” But I’m just not sure what to make of that for the dataset overall.

    Bruce Wilder,

    I don’t know what that drop-upsurge is all about. Didn’t the economy sour some under GHW Bush, so that he had to renege on his “no new taxes” pledge? Maybe that’s what the surge was all about. The major jump (17.6 to 20.2) was between ’92 and ’93, which in Clinton’s first year and, I would guess, owing more to his predecessor.

  • I think much of the top 20% has come about from the absolute gluttony of wealth generated by the very top percentile of earners. This would include professional athletes, entertainers and corporate execs, in particular, the majority of which make insane amounts of money today.

    The variance among the top 20% is enormous, I would bet. Someone making $100,000 may fall into this group, but they hardly compare to someone else – in the same quintile – making $50 million a year.

  • Hark,

    I just spent an hour or so browsing Technical Paper 63RV, “Design and Methodology”, for the Current Population Survey, jointly published by the Bureau of Labor Statistics and the Bureau of the Census, and I must admit I’ve come up dry.

    On page 5-1 it says that “respondents are asked to report their usual income before taxes and other deductions”, but it doesn’t really say how they construct “aggregate household income” so far as I can tell. My hunch, this being the Administration that it is (a pack of liars at best), is that they’d do everything they can to avoid pesky stuff like unearned income. But I can’t cite you chapter and verse. Sorry.

  • Paul Krugman had an excellent article in the New York Times Sunday Magazine, 10/20/02, (link below) about this topic. Krugman explains that:

    “Some — by no means all — economists trying to understand growing inequality have begun to take seriously a hypothesis that would have been considered irredeemably fuzzy-minded not long ago. This view stresses the role of social norms in setting limits to inequality. According to this view, the New Deal had a more profound impact on American society than even its most ardent admirers have suggested: it imposed norms of relative equality in pay that persisted for more than 30 years, creating the broadly middle-class society we came to take for granted. But those norms began to unravel in the 1970’s and have done so at an accelerating pace. ”

    For me this is the most plausible explaination I have heard for the growing income inequatility.

    http://www.pkarchive.org/economy/ForRicher.html

  • Thanks, Ed.

    I suspect that in most surveys unrealized
    capital gains are not included. I don’t know
    where the data would come from. But as we
    all know, as you get into the top 10%, unrealized
    capital gains accelerate rapidly to the top
    earners until they become virtually obscene.
    What makes it all the more repulsive is that
    when realized, the tax rate is only 15%.

    At any rate, if unrealized gains are not included
    in the graph, the situation is considerably
    worse than it appears. And I bet if the
    data were broken down into tenths, instead
    of fifths, it’d be a real eye-opener.

    I don’t understand why the American people
    are not screaming in outrage. Do they not
    understand that while most ordinary workers
    pay a marginal tax rate of 27%, billionaires pay
    only 15% on what they don’t earn, and only
    when they cash in?

  • It would be interesting to see what this chart looks like for the fifty years prior to these ones. Any source for that data?

  • Yeah, run that graph back at least to 1900. It would be interesting to see how the run up to 1929 looks.

  • It looks like the third and fourth quintiles took the biggest hit. Both dropped by about a sixth, from 18% to 15% (third quintile) and 12% to 10% (fourth quintile).

  • I write a financial and investment newsletter as a hobby. In my last three issues I have been following the theme of shifts in income inequality from some different angles.

    GMO LLC ( a large investment manager whose head is from thee UK, Jeremy Grantham) recently published some data regarding how wages in the US have greatly lagged Europe, the UK and Japan from 1970 to 2005, while profit growth in these economies have increased at about the same rate. Simply put, wage growth in the US greatly lags. By some measures, wage growth has actually fallen when adjusted for econmic growth. Fallen not in a real sense becasue of inflation, but fallen in adjusted terms.

    Oh, one class of US wage earner had better compensation growth, wage earners paid bouses and stock options. Their growth began to diverge in 1975 and accelerated in 1995.

  • Rege,

    Thanks for that link. Great data, it would seem. I hate PDF files though – everyone should offer their data in spreadsheet format somewhere, as the Census Bureau does, so the rest of us can play with it.

  • Their gains have come from losses spread almost evenly across the lower four groups.

    Well, that’s only to be expected, as this graph is about the percentage of income per quintile. The only trend that stands out is that the top quintile is taking in more. The rest just follows naturally. Now, if they were taking it from just the poorest quintile, that would be worthy of comment and speculation as well.

  • It would also be interesting to see the top 1% shaved off the richest fifth and given its own line, and see how its proportion has grown.

  • Program on the emergence of civilization.

    “14 species of large animals capable of domesitcation in the history of mankind.
    None from the sub-Saharan African continent.
    13 from Europe, Asia and northern Africa.”
    Favor.
    And disfavor.

    They point out Africans’ attempts to domesticate the elephant and zebra, the latter being an animal they illustrate that had utmost importance for it’s applicability in transformation from a hunting/gathering to agrarian-based civilization.

    The roots of racism are not of this earth.

    Austrailia, aboriginals:::No domesticable animals.

    The North American continent had none. Now 99% of that population is gone.

    Organizational Heirarchy
    Heirarchical order, from top to bottom:

    1. MUCK – perhaps have experienced multiple universal contractions (have seen multiple big bangs), creator of the artificial intelligence humans ignorantly refer to as “god”
    2. Perhaps some mid-level alien management –
    3. Mafia (evil) aliens – runs day-to-day operations here and perhaps elsewhere (“On planets where they approved evil.”)

    Then we come to terrestrial management:

    4. Chinese/egyptians – this may be separated into the eastern and western worlds
    5. Romans – they answer to the egyptians
    6. Mafia – the real-world interface that constantly turns over generationally so as to reinforce the widely-held notion of mortality
    7. Jews, corporation, women, politician – Evidence exisits to suggest mafia management over all these groups.

    Survival of the favored.

    Movies foreshadowing catastrophy
    1986 James Bond View to a Kill 1989 San Fransisco Loma Prieta earthquake.

    They can affect the weather and Hurricane Katrina was accomplished for many reasons and involves many interests, as anything this historical is::
    1. Take heat off Sheenhan/Iraq, protecting profitable war machine/private war contracts
    2. Gentrification. New Orleans median home price of $84k is among the lowest in major American cities, certainly among desirable cities.

    Journal: 10 composition books + 39 megs of text files

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