Share of Income Gains by Quintile - Great Depression til Now

http://www.nytimes.com/imagepages/2011/09/04/opinion/04reich-graphic.html?ref=sunday

by watmough • 15 years ago

321 278 15 years ago

bilbo0s• 15 years ago

Is anyone able to explain this chart for me?

When they say that the 'Top Fifth' are all of the people in the labor force making over USD112541, does that mean that 20% of American workers make more than that?

That's pretty astounding to me, if it is indeed the case. At a labor force size of about 154 million people, that means that over 30 million people are making over USD112541. I know that a good number of people are making WELL over USD112541 actually, though I thought it was just because of my neighborhood and social group.

To see the aggregate numbers is staggering. Where is the money coming from to pay that many people that much? I have some inkling that this is what leverage and debt do for an economy, but ... wow.

Any econ profs, or grad students around to explain ho this is possible?

rayiner4• 15 years ago

These are household income quantiles, not personal income quantiles. It's not stated on the chart, but that lines up better with: http://en.wikipedia.org/wiki/Household_income_in_the_United_...

pinko• 15 years ago

Yes -- many families have shifted from single to dual-earner in order to maintain the same standard of living, so the household income charts really understate the decline in individual wages over this period.

mistermann• 15 years ago

Furthermore, running $1 trillion deficits helps.

$1 trillion / 153 million workforce = ~$6500 / worker = $13,000 per household

It's not too hard to imagine that somehow this money tends to flow moreso towards people in the upper quintile (straight wage-earners would miss out, whereas the investing class has many avenues to receive it), so it wouldn't surprise me at all that 1 household could end up with their "share" plus that of 2 others, so: $13,000 * 3 = $39,000 household income based on govt deficit spending $112,541 - $39,000 = $73,500 household, /2 = 36,500 per person in "real", non-deficit enhanced earnings required to make the top quintile.

Made up entirely, but I don't think it is an unrealistic scenario at all. The enormous deficits we are now running can go a long way in hiding the truth for a very long time. Meanwhile, the debt grows and grows, and the interest on that debt gets larger every year. I just don't see how debt is inconsequential, but the vast majority of people seem to act as if it is (at least those who are even aware of it).

victorbstan• 15 years ago

So the working class has been taken to the slaughterhouse?

My billion dollar question: What happened at the end of the 70's / beginning of the 80's?

lukesandberg5• 15 years ago

in short ronald reagan tax breaks and labor market deregulation: paul krugman has essentially a whole book on why this occurred (http://www.amazon.com/Conscience-Liberal-Paul-Krugman/dp/039...) It is an amazing book that really changed my view of labor unions. i would recommend it to anyone. heres an example from his blog: http://krugman.blogs.nytimes.com/2011/07/30/more-about-the-r...

he has a lot of stuff on his blog discussing tax policies and their effect on things like income growth.

silvio• 15 years ago

The easy conjecture is to point to a combination of trickle down economic policies and the rise of cheap digital replacements, but I don't have a good analysis to back this up.

dmm2• 15 years ago

End of the postwar boom? Following WWII the US dollar became the world's reserve currency, this created a situation of constant demand for USD. The raised the value of the US dollar and made resources cheap for the US. (It's also allowed us to abuse the currency quite a bit. This will not last.)

Demographic changes which had been happening for years continued: in 1945 16% of the total labor force worked in agriculture, by 1970 only 4% did (it's <2% now). People were moving from rural areas to cities and getting jobs in industry, changes which brought immediate changes to income and living standards.

In the 70s and 80s huge amounts of industry moved out of the country, first to Mexico and then to Asia, seeking cheaper labor. The rest of the world starting catching up with us, they were moving from agriculture to industry too. This made the more expensive labor of the US less competitive. The US economy shifted to something we couldn't use Chinese labor for: building houses(and weapons) for each other.

The postwar period was really an exceptional time. Lots of things happened really. I don't think you can really attribute the changes that came at the of the 70s to a single event or policy.

lukesandberg5• 15 years ago

This is the fundamental problem with macro economics. there is no way to isolate variables. So obviously saying it is 100% attributable to Reagan is probably not true.

but also (to take some of your points) global competition would effect firms profit margin and theoretically depress income growth. but it does not necessarily explain why income growth shifted away from the middle classes. the issue is more about growth distribution than the presence of growth.

Andrew_Quentin2• 15 years ago

I do not think the graph applies solely to America or that the stagnation or even fall of the share of gains only happened in US. I think much of the west shares the same story, thus, reserve currency, unique place in the world after the war etc explain the large gains in power, but not the effect of the graph as if it were so there would be a different story for Europe which there isn't. Therefore, it probably was the Thatcher Reagan policy changes.

daniel_solano• 15 years ago

The primary problem with this type of comparison is that it completely ignores economic mobility. Someone simply isn't born into a given income bracket and stays there for life. Most people's earning potential goes up over time. Speaking for myself, I think I've been in all five quintiles.

bendotc4• 15 years ago

The US doesn't do terribly well in terms of economic mobility compared to other developed nations, either: http://www.npr.org/templates/story/story.php?storyId=4662456

It's hard to move out of the bottom quintile when the bottom quintile is generally doing so poorly, though of course it's possible, in some cases, to still do so.

rayiner4• 15 years ago

Yup. The chart ignores changes in demographics.

Compare the US population pyramid in 1950: http://tfw.cachefly.net/snm/images/nm/pyramids/us-1950.png

To the US population pyramid in 2005: http://tfw.cachefly.net/snm/images/nm/pyramids/us-2005.png

Look at just how many more people are in the 40-55 demographic (peak earning years).

forinti• 15 years ago

I'm not convinced. You have to look at each person's context, because your family's values will take you a long way (or hold you back).

And the US seems to have lower mobility than other rich nations: http://voices.washingtonpost.com/ezra-klein/2010/08/research...

ellyagg• 15 years ago

Every time this study or one like it is trotted out, it drives me nuts. What a society should be looking for is freedom of mobility, not arbitrary mobility.

According to an article on NPR that was linked but then deleted here a minute ago, 80% of Americans think that one can still pull oneself up by their bootstraps. In the article, the subtext was that this mobility study proved that Americans were morons and don't realize how stuck they are.

What hogwash. If we think about what Americans and immigrants are actually seeing that makes them feel so hopeful, it's the opportunity of mobility through one's own efforts.

What opportunity of mobility does not imply is the greatest statistical father-son mobility. That would only be the case if each person born were randomly allotted IQ or EQ or whatever your favored intellectual attribute is for being more likely to succeed. But that's not how genetics work.

Not only that, but each person would have to be born into families with precisely the same quality of upbringing. But neither is that the case. In fact, on average, successful parents have successful habits that they pass on to their children.

The upshot is, the method of this study is absurd. The correlation between your dad's income and your income does not represent freedom of mobility, it's just a lot easier to measure.

One can easily imagine societies arranged with more arbitrary success paths that lead to greater father-son mobility than a meritocratic society organized by families of natural born children.

No money needs to be involved for the preceding to be case.

Now, I actually favor an even greater level of meritocracy. I would be interested in something like a 90% death tax, to be put in a pool and distributed proportionally to children upon a certain birthday. I can see all sorts of problems with the naive version of that idea, but something in that spirit would be fantastic. Let's get rid of family money dynasties.

DanielBMarkham2• 15 years ago

Your observation is a known flaw with this line of thinking. In fact, it's such a powerful rejoinder I'm really surprised the NYT didn't address it.

If I remember correctly, movement among quintiles in the US is such that the average person moves through many. Yes, there are the permanently wealthy, and the permanently poor, but they are the exceptions rather than the rule. So when people say "the rich get richer" what they really mean is that the income segment defined by that qunintile, over all, got richer. Individual people, however, move around a lot, as anybody who has participated in the economy in the last couple of decades can attest.

I know I'm not sourcing my statement. Apologies. I'm simply relying on several rebuttals to this type of graph I've read over the years. Hopefully somebody else will be able to provide some more substance and move the discussion along.

EDIT: Random Google link: http://www.urban.org/publications/306775.html

These studies of relative mobility have produced remarkably consistent results, with regard to both the degree of mobility and the extent of changes in mobility over time.[5] Mobility in the United States is substantial according to this evidence. Large proportions of the population move into a new income quintile, with estimates ranging from about 25 to 40 percent in a single year. As one would expect, the mobility rate is even higher over longer periods—about 45 percent over a 5-year period and about 60 percent over both 9-year and 17-year periods.

leot4• 15 years ago

I call b.s. In economics, the extremes are strongly self-reinforcing. I would be really surprised if in a given year more people left the top 0.05% (in net worth) than stayed there. I'd even be surprised if the ratio were less than 5 to 1.

_delirium4• 15 years ago

Those statistics aren't actually that encouraging, though they aren't bad per se. If 60% move a quintile over 17 years, that means 40% stay put long-term. And that isn't even a measurement of large income mobility, like jumping more than one quintile. Iirc from data elsewhere, the most common quintile moves by far are churn between the 2nd/3rd/4th quintiles, with 2-or-more-quintile jumps and movement in or out of the top and bottom quintiles being less common than 2nd<->3rd or 3rd<->4th drifting.

tokenadult• 15 years ago

The other issue is the that level of consumption of everyone in every household income quintile in the United States has steadily been going up (in a way not fully reflected in the consumer price index or other gauges of consumer behavior), so almost everyone has more stuff, more space, and more comfort and health than people in the "same" income quintile did in my childhood. There may indeed be some structural, societal problems caused by uneven income distribution (what I have liked about the United States and Taiwan, the two countries I have lived in the longest, is that they have tended to have better Gini coefficients

https://www.cia.gov/library/publications/the-world-factbook/...

http://hdrstats.undp.org/en/indicators/161.html

than some other countries around the world), but there will ALWAYS be some people who make more money than some other people living in the same country, and the main issue is to help each country and all the people living in each country gain prosperity over time, which has been the general worldwide trend.

http://www.theworldeconomy.org/

http://www.economist.com/node/18679001

To reply to a question in another comment below:

So the working class has been taken to the slaughterhouse?

No. Americans of all income levels still enjoy unparalleled prosperity compared to most people around the world, and the high rates of voluntary immigration into the United States even from countries that are themselves prosperous show that something about the overall mix of living conditions here isn't "slaughtering" people but rather meeting many people's aspirations on balance, in some way that makes moving far away from home an appealing idea.

rauljara• 15 years ago

You are introducing an additional variable that doesn't make any sense to include. Even if mobility is greater now than it was (something of which I am skeptical), the fact remains that the top quintile is still only ever 20% of the population. If one new person moves into the top quintile, that means someone else has moved out.

"Most people's earning potential goes up over time." This is generally true, but it goes up like compound interest. If you start high, it tends to get massively high by the time you retire. If you start in the middle range, the results are much less impressive. If you stay poor for very long after being done with school, your gains tend to be miniscule.

sp332• 15 years ago

Right, but that's why it makes sense that the top quintile should have runaway gains like those shown. I would expect that.

forensic13• 15 years ago

You're arguing that an aristocracy is OK as long as they didn't get there through heredity.

First of all, I would disagree that social mobility is increasing. Rich kids are doing better than ever.

Secondly, I believe history indicates that hereditary aristocracies are actually less brutal and dangerous than "merit"-based ones. It is the revolutionary forces that destroy societies and kill tremendous amounts of people. People born into poverty who work their way to the top through a sociopathic drive for power and look down on everyone else with a blame-the-victim mentality.

These people are dangerous. And Hacker News is full of them.

runako• 15 years ago

The relevant question isn't whether most people's earning potential goes up over time. That's pretty well baked into most jobs (older people manage younger people and get paid more than their charges, for example). So yes, you should make more at retirement than at 18.

The relevant question is around mobility between quintiles. Put another way: how likely is a person to retire in a higher quintile than the one in which he/she was born? The data pretty conclusively show that the US is calcifying in this regard. In other words, it's more difficult to move up to a higher bracket now than it was 30 years ago, etc. I don't have a citation handy, but I believe Elizabeth Warren has done some research into this area (as have others).

rgrieselhuber• 15 years ago

What happened in the late 70s?

rayiner4• 15 years ago

Reagan (1981-1989).

bendotc4• 15 years ago

To be fair, Carter's reign wasn't exactly an economic wonder-time, and I don't think Reagan was influencing the economy that much as governor.

I do think there's a political dimension to the change, but laying the blame at Reagan's feet exclusively seems like simple political point-scoring.

Edit: it's funny seeing this comment getting down-modded. I think I'm significantly more liberal than most people here, but it looks like people are upset that I called out empty partisanship? I fail to see anything particularly inflammatory about what I wrote.

johngalt• 15 years ago

So by extension the current economic downturn is entirely Obama's fault then? Also, take a close look at the graph. Looks like things had stagnated in the early 70s, but the graph does it's best to hide that. Now off we go to partisan bickering about who was in control of congress blah blah... it's all BS.

It's silly for presidents to talk about the economy at all. It's just another way for politicians to take credit for something they aren't responsible for. Do you think Jobs and Woz started Apple because of Carter's economic policy? Do you think Microsoft succeeded because of Reagan?

Of course some companies rise and fall along with the political tides. I suspect that a close examination of these will show you bribes and favoritism. Companies that depend on a favorible political climate probably aren't adding to the economy at all.

notaddicted• 15 years ago

With the caveat that this facile explanation is almost certainly insufficient to explain large scale changes in the largest national economy:

I believe during the boom years of industrializaton, THE scarce resource was manpower. Factories were full of machines, and machines were operated by humans. In 1943 U.S. Steel employed 340,000 workers.

The high demand for manpower allowed workers to capture a greater proportion of the economic surplus their activities generated through negotiation.

At some point other ingredients of business became crucial and thus the balance of power shifted.

Vivtek5• 15 years ago

The rise of the corporate raider mentality. Instead of making money by making and selling things, American corporations shifted towards financial games instead, seeing a prosperous factory as an unmined resource to be cut up and sold to the highest bidder.

We've been eating our seed corn ever since.

AlexC04• 15 years ago

I don't know if I saw this on HackerNews or Reddit, but this one has a graph that goes well with the link in the parent post.

Left behind in America: Who's to blame for the wealth divide?

http://www.cbsnews.com/8301-503544_162-20102289-503544.html

cperciva2• 15 years ago

The 'what people want' on that page shows that people are confused between wealth and income; nothing more. The simple fact of saving money for retirement creates more wealth concentration than that.

adamjernst• 15 years ago

This analysis also ignores actual purchasing power (non-core inflation). Wages may have stagnated, but purchasing power for non-core goods has soared.

Free trade is a powerful cause of both wage stagnation and purchasing power. Sure, eliminate free trade and the working class will see wages go up; but they'll spend those wages on $4000 plasma TVs and $50,000 economy cars.

akeck• 15 years ago

Do the limits in the chart (both parents working and household debt maxed) and your observation mean that increases in consumer demand in the near-to-medium term can only come from increases in purchasing power?

forensic13• 15 years ago

People making your argument always mention TVs, they never mention rent, land, food, education, childcare, or healthcare.

1. Rent

2. Land

3. Food

4. Education

5. Childcare

6. Healthcare

You know, the stuff that actually matters.

I'll give up my $400 LCD TV to be able to afford having my spouse stay home. No problem.

I'll give up my Hyundai to be able to get a degree on the cheap like they did back in the 60s.

I'll give up 100% of my silicon-based technology if in exchange I can afford to own some land. Easy choice.

If I have to become a silicone-smashing luddite to return to 1960s level wealth, fine. I don't love computers THAT much.

Vivtek5• 15 years ago

I'll give up 100% of my silicon-based technology if in exchange I can afford to own some land. Easy choice.

You can't possibly be serious. Why aren't you already in Nebraska, then? There's plenty of land in the United States, most of it dirt cheap (being dirt). If you're not already from the country, you probably don't know why we all left the country. (Myself included.)

learc839• 15 years ago

Repost of something I wrote the other day that I think is relevant:

My very average house today is a huge luxury compared to the very average house my grandparents bought in the 60s. I have a cable bill, an iPhone bill, an internet bill, a netflix bill, and too many various SaaS subscriptions. My grandparents had none of those.

I also have a much higher power bill to pay for all my consumer electronics and air conditioning, a higher health insurance bill to pay for drastically better health care, an extra car insurance policy.

That's in addition to all the extra stuff I have lying around. 2 cars, not one, both of which are vastly superior and more expensive than what my grandparents had. Superior home appliances. And 1 metric tonne of electronics. I have so much more material wealth than all but the very richest did just 50 years ago. How could I complain that I'm not better off?

csomar2• 15 years ago

There are lots of third-world countries that will offer you what you want, but you'll give up (exactly) the LCD TV, your car, and the technology.

If you are good in English, you can teach it in some third-world country, while making some money in the side with the Internet. That will afford what you want.

usaar3333• 15 years ago

The items you mention have not increased in price due to trade.

1/2. Rent/land: Remain cheap in the midwest. Very nice 3 bedroom houses in suburban Texas can be had for $125,000; you can easily buy one on a software dev's salary (in other words, 1950s style where the husband as only worker). Insist on living on the West Coast? Well, you can blame the obscene housing prices on a combination of population increase and zoning laws.

3 food. Ok, we're looking at maybe 50% increase over raw inflation from the 1950s. Aside from this being a small increase, most of this increase can be attributed to additional food safety and even more importantly surging price in oil due to larger world population.

4. Education: Sure, it's surged, but again this is due to lower taxes and more social programs, not trade. Besides, education ($60k tuition for 4 years in public school) isn't that bad compared to the the savings on cars alone over a lifetime.

5. Has this gone up? Assuming your spouse was working in the 1960s that is.

6. In all fairness, life expectancy is significantly higher now than 50 years ago.

brown9-2• 15 years ago

Wages may have stagnated, but purchasing power for non-core goods has soared.

And why is this all that relevant, especially considering that purchasing power for core goods (which you don't mention) has probably declined?

jonnathanson• 15 years ago

"...purchasing power for non-core goods has soared."

I've heard this argument quite a bit. I'm not convinced it's true. Is it the case that purchasing power for "non-core goods" has gone up, or that the cost of producing such goods has gone down? More likely the latter, IMO.

Look at the cost of home computers, for example. Most PCs cost a mere fraction of what they did back in the '80s and '90s. That has nothing to do with purchasing power increases, and everything to do with the decreasing cost of manufacturing PCs. Same thing with plasma TVs. Or with any new technology as it moves along the curve from state-of-the-art toward commoditization.

johnnyg• 15 years ago

How is productivity measured? GDP / (Hours Worked * Salary) = Productivity?

bendotc4• 15 years ago

It's a bit more complicated than that: http://en.wikipedia.org/wiki/Labor_productivity

nhaehnle6• 15 years ago

Salary does not factor into the computation. The pure definition is GDP / Hours worked, though as with all statistics, there may be proxy variables and other subtleties involved.

ry0ohki• 15 years ago

My guess as to what happened in the late 70s... the microprocessor, and computers becoming part of the workforce.

radagaisus• 15 years ago

I haven't seen it featured in a lot of US news agencies, but the economical situation is Israel might be insightful in comparison with the US.

For the last couple of months Israelis are protesting about the economical situation around the country. The focus of those protests is the neo liberalist and capitalist direction the country took. You can search for #j14 on twitter. The protest demands among other things social justice, free education from the age of 3 months and free housing.

Last week 400,000 protested around the country. That's about 7% of the population.

Oh, and today S&P just upgraded Israel credit status to A+.

wanorris3• 15 years ago

You know A+ is way below the credit rating the US was downgraded to (AA+), right?

Gormo4• 15 years ago

Every time I see this kind of chart, I always wonder why the aggregate income distribution of a population is a metric that anyone ought to be concerned about.

What does one person's income have to do with anyone else's - why would you aggregate everyone's separate incomes into a single figure in the first place?

And if someone's particular income is insufficient to meet their needs, how do the aggregate population data help rectify that problem?

Vivtek5• 15 years ago

It's a pretty good indicator about the real impact of poverty in that society. If a lot of the wealth is concentrated, the people in the middle and bottom are very squeezed in terms of what society actually offers them (generally), whereas if the wealth is more evenly distributed, society tends to make sure everybody's getting along well, with health care and schools and what-not.

Of course, you can definitely throw the baby out with the bathwater on that one. If there's completely even income distribution, the only motivation you have to do any work is just because you like to work - and most people don't like to work much. And then people compensate with non-income power imbalance, usually, so things are still not equitable.

Gormo4• 15 years ago

> If a lot of the wealth is concentrated, the people in the middle and bottom are very squeezed in terms of what society actually offers them (generally)

I'm not sure I understand the connection though. I don't see how one party having a large amount of wealth, however defined, necessarily precludes any other party from having any amount of wealth.

> whereas if the wealth is more evenly distributed, society tends to make sure everybody's getting along well, with health care and schools and what-not.

But the underlying underlying in statements like this is that wealth originates in the aggregation, and individuals subsequently claim a portion of it, which seems counter-intuitive and false.

Particular people build things like schools and hospitals in particular places, generating wealth for the specific people involved. 'Society' doesn't ensure that people have these goods; people create these goods for themselves, and generate society in the process.

cbs• 15 years ago

>What does one person's income have to do with anyone else

If I make $10/yr I could be the richest man on earth or the poorest. It kind of depends on what everybody else makes too.

Gormo4• 15 years ago

Right, but this sort of begs the question: why does it matter whether you're the richest or poorest? Isn't the relevant question the extent to which that $10 worth of wealth satisfies your own needs, irrespective what anyone else may or may not have?

_delirium4• 15 years ago

I find the lack of increase in (inflation-adjusted) median wages to be the more interesting headline, not the distribution of wages per se. In effect, the average person has not seen any improvement in prosperity from the large productivity improvements that technology has brought us. I think that's problematic, in part because it makes it harder to argue that the tech sector's growth will bring prosperity to the average person (rather than just to us techies).

Gormo4• 15 years ago

Perhaps the earlier "jobs are obsolete" argument is right, and people aren't reaping the benefits of technology as much as they might because the productivity improvements that it creates inhere in an economic abstraction layer that they're not participating in to the extent that they might.

If we imagined the way modern technologies might be applied to the productive capacity of a family homestead, for example, the improvement that technology brings to the homesteader's quality of life should be directly apparent, without the need to rely on macro-level metrics at all.

sparkycollier2• 15 years ago

They may not have more money in their pocket, but they have an iPhone or android in there which I think qualifies as a pretty amazing form of "participation" in the amazing gains driven by technology.

pg3• 15 years ago

Technological progress should cause increasing economic inequality, because the bottom end of the scale is firmly anchored at zero (someone taking a vacation), while technology gives the top end ever more powerful levers.

So the interesting question is not why economic inequality is increasing, but why for a few decades in the mid twentieth century the trend was reversed.

There are probably several factors at work here, but as someone who was around and paying attention at the end of that period, I think the key to the answer is the large corporation. The period of flattening coincides with the heyday of the large corporation.

Large corporations tend to decrease economic inequality. You can't measure individual productivity well within large organizations, and even if you could, it would strain the fabric of the organization to reward people that way. They also hide a lot of inequality by giving elite employees benefits that don't show up in their salaries (http://paulgraham.com/ladder.html).

What happened at the end of the 1970s was that the most ambitious people started to lose interest in working their way up the corporate ladder. They wanted to get paid upfront. That was why the term "yuppie" was born then. Before 1980 it was rare to find young professionals with lots of money. In the old days, they were all still paying their dues at that age.

I remember the transition quite clearly. When I was a little kid, in the early 70s, the most impressive thing you could do was to work for a large corporation. It was the era of conglomerates in shiny office towers. By 1980 we were starting to see a glimpse of the world we now live in, where the ambitious people are all free agents.

wanorris3• 15 years ago

Don't you think that the top tax bracket being slashed from over 70% to well below 50% had something to do with it as well?

pg3• 15 years ago

Less than people think. Back when taxes were so high, the rich were really good at tax avoidance. So the rate doesn't tell you the whole story.

As one of the people whose opinion about working for a large company changed during the 1970s, I know I didn't consciously think about tax rates. (It's possible they affected me unconsciously though, via the examples of people who'd cleared more after tax due to lower rates.)

btilly2• 15 years ago

Go back further. 70% itself was a major slash by JFK (a very rich person from a very rich family) from the previous 90%+ in the 50s.

Before that, there was no point in being paid more. The only thing that made sense was to take pleasure in the organization that you ran.

gopi• 15 years ago

You were confusing the top income tax rate with the effective tax rate. When the top income tax was 91% (from 1951-1964), the capital gain tax was 25%. So the effective tax rate paid by the rich was always the same, infact the rich pay more in tax today at the current top 35% rate than when it was 91%!

portman• 15 years ago

"Technological progress should cause increasing economic inequality"

Does that mean you are unfazed by growing inequality, and view it as an unavoidable byproduct of progress?

Or do you believe economic inequality is a negative externality (like pollution) that needs to be remedied?

nicholasjbs• 15 years ago

pg's thoughts on inequality: http://paulgraham.com/inequality.html

pg3• 15 years ago

I don't automatically assume it's a problem, as so many people seem to. I don't assume that all economic inequality is the medieval type, where the rich are the winners of a zero sum game.

At the high end of the scale it doesn't seem to be a problem. I've seen a lot of people go from middle class to rich when their startups succeeded. Most live pretty quietly.

I would guess most of the damage done by economic inequality is at the low end. I don't think there is much debate that societies should try to mitigate that.

anamax2• 15 years ago

> Or do you believe economic inequality is a negative externality (like pollution) that needs to be remedied?

I'm pretty sure that you're not measuring inequality in a reasonable fashion.

Larry Ellison has a lot more resources than I do, but the net worth ratio is far greater than the opportunities ratio.

Yes, he could afford his own space program, but we both can afford to go diving. He can't drive his (much more expensive) car on 101 any faster than I can. And so on.

I'm actually running into this problem. I'm trying to get someone to help with a project. One of the sticking points is that the potential reward, while "huge" by some measures, won't significantly change what he can do. Since your model predicts otherwise, it's clearly wrong.

How about you figure out how to measure the actual "problem" before proposing solutions?

cjy• 15 years ago

Inequality can be a bad thing without being an externality. Externality has a precise economic meaning. Pollution is a negative externality because the byproduct of my voluntary transaction to buy gas and burn it in my car is that you have to breathe the exhaust. You are an external third party that is hurt without compensation. What external third party is being harmed when one person produces a lot and gets rich and another person doesn't?

One economic argument against inequality is that it results in people spending a lot of resources on guard labor. If I live in neighborhood with lots of inequality I have to spend lots of resources keeping the poor people from stealing my things. Therefore, reducing inequality via income distribution can create a public good in the form of less crime (and less resources wasted on protecting property). Thus, you can argue that redistributing income makes sense on the same grounds that having public police makes sense. That is an efficiency argument for reducing inequality.

bbuffone• 15 years ago

inequality is freedom. equality is not! So... if you believe in a free society and open markets then inequality is neither good or bad, it is what happens.

hans002• 15 years ago

Man, what fantasy world do you live in? Large corporations decrease inequality? [citation needed] Ambitious people started to lose interest? I can't even dignify that with a [citation needed]. Ambitious people have what to do with anything on a national scale? Ambitious people somehow caused, or were party to, the decimation of the middle class, which somehow never once gets mentioned by the actual economists and political theorists who actually know stuff about this stuff?

Oh! Are you "pg" of that ludicrous "hackers and painters" essay, the one that actual painters tore to shreds because it's the same sort of bizarre nonsequitor drivel? I can see you're still at it. Nice "work".

learc839• 15 years ago

Since you're unaware he's also "pg" who created ycombinator.

Edit: I'd like to point out that this wasn't some kind of appeal to authority to support pg's arguments, so kindly explain the down mods.

csomar2• 15 years ago

You don't seem to be serious, but I'm making this reply for other people in HN. I might be wrong, so judge and reply.

Large corporations decrease inequality?

Yes. All (most) software developers in a large corporation are paid the same wage. Well, there are persons that can make millions not working in a company (ie. Indie game developer, iphone app developer...). But when you work for a large corporation, you might take 20% more than the average developer, but not 20X times more.

So large corporations increase equality among developers. Boss get paid 10 times more than a dev. gets? Well, a boss is not a developer, and you are doing the wrong comparison here. Compare the boss in this corporation to another boss in another large corporation. They are getting paid in the same range, no? That's equality.

When you are your own boss, and your friends is his own boss; you can become as unequal as you want. So, small businesses and startups promotes inequalities.

scarmig3• 15 years ago

I don't buy pg's argument, but I don't find it implausible at all that an economy dominated by a few large employers will tend to have more similar compensations for the same job class than one of many small companies.

If you did a survey of developer compensations in Silicon Valley, do you think (a) developers who work in corporations with over 500 or (b) developers who work in companies with under 50 would have more egalitarian compensations?

My intuition suggests the former, in line with pg. I'd love to see actual evidence of this, though.

My disagreement with PG would come with whether that's the primary driver of inequality. For that, I'd argue it's the increasing power of generic capital over generic labor, instead of competition between specific types or quality of labor.

jbooth• 15 years ago

I think this comment only acknowledges the existence of white collar jobs. You used to be able to pay for a house, a car, and the kids' college education with a factory job. While the wife stayed at home. Now, that scenario is eye-popping unbelievable. You're probably at wal-mart or starbucks if you don't have some sort of specialist skill or a connection into the white collar world.

I'm not endorsing a particular solution here, and specifically not endorsing forcing factories to employ expensive people instead of cheap robots to 'create jobs'. But it's important to see the situation clearly.

Typhon• 15 years ago

The disappearance of blue collar jobs is most probably due to the fact that it is cheaper to put them in faraway countries where minimum wages either don't exist, or are ridiculously lower.

shawndrost• 15 years ago

You're right that it's gotten harder for blue-collar people in the US. However, those jobs now belong to former subsistence farmers in developing nations, so it's quite different when you look at it from a global perspective.

raldi2• 15 years ago

> You used to be able to...

And you still can, if you live like it's 1960. Cancel cable, Internet, and everyone's cell phones. Never fly. Don't buy organic food. No HDTV, iPod, iPad, or laptop. Have a modest wedding. Don't send your kids to college. Live in a one-story house with one bathroom and a small garage for your one car.

If people today have to work harder and smarter than their 1960s counterparts, it's because they choose to pursue a correspondingly higher quality of life.

joshklein• 15 years ago

These data relate to "production and non-supervisory workers" (82% of today's private sector work force). The people you refer to would seem to comprise the other 18%.

RyanMcGreal• 15 years ago

The more interesting question for me is: why are the dividends of increasing productivity no longer being shared with employees?

forensic13• 15 years ago

because those employees did not produce the increase in productivity, technologists did.

The technologists and the entrenched oligopolists ate all of the surplus while the commoditized worker drones got nothing. Which is inline with free market theory. The wealth goes to the people who produce the wealth and the people who corner the market.

startupcomment• 15 years ago

Just conjecture: senior management in established corporations have stacked the payscales in their favor. I know senior managers in established corporations who have received ridiculously large bonuses and stock option grants for doing nothing other than what should ordinarily be expected of them for the benefit of the corporation, and their level of risk is so small relative to their reward. In some cases, the benefit to the corporation is of questionable value, yet excessively lavish compensation is granted. I suspect that some of these senior managers are greedier and more short-term oriented (I'll milk this baby as much as I can for my personal gain here and now) than their pre-yuppie predecessors. Maybe there was a greater sense of self-restraint and balance in depression and WWII-reared generations (or maybe just lower expectations and objectives)?

dogwelder3• 15 years ago

I think because, there's no reason to assume they would be - labor costs are still (mostly) driven by supply and demand. If gizmos and computers and internets increase a worker's productivity, the gains go to the business owners, while the worker still gets paid at whatever the labor market decides. (During the 60's era wage earners had some natural advantages: booming demand for labor, restricted supply since single-income households were the norm, less ability to send manufacturing or service jobs offshore.)

Higher top rates in the 60's era also meant some of that productivity gain in wealth went back to the average worker. The whole economy gained wealth from public investment in infrastructure, funding for education, healthcare research and so on. But around the late 70's, the tide started to turn towards lower taxes at the top. A few more trends got rolling at the same time: technology that made big productivity gains possible; entire manufacturing industries being sent overseas; the financial industry getting really interested in ways to move existing wealth from where it was, to their own pockets.

That makes it sound entirely bad, which it wasn't... those trends also led to a slew of innovative new companies, disruptions to established business practices, stock options as a way to share in the risk and reward, and lots of cool gadgets. It's more interesting now than in 1960. But there are a lot of workers getting the shaft, and don't necessarily need to be.

Andrew_Quentin2• 15 years ago

Because of the dismantling of the unions. I can not see any other factor being much more different than today, save for perhaps the deregulation of the banks where it seems a lot of wealth is concentrated, wealth which, I do think is a zero sum game as, whatever productivity might increase, it is taken away from some and given to some.

Someone mentioned the technological advances, but technology did not start in the 70s. We had the invention of energy before then, TV, radio, aeroplane, car, etc. So, I think that the period where the employees started sharing less of the gains seems to coincide with the dismantling of the unions, which, on a common sense approach also it makes sense as loosing your bargaining power you would expect would mean getting a worse deal.

trevelyan2• 15 years ago

I suspect you're the exception rather than the rule, Paul. Checking the numbers released by the Bureau of Labor Statistics shows that the percentage of self-employed workers in the economy has FALLEN from 10 percent of the workforce in 1968 to 8.5 percent today.[1] Fewer people are working for themselves, although you're right that the 1980s seem to be when things started to change.

[1] http://www.bls.gov/webapps/legacy/cpsatab9.htm -- only stats on unincorporated single-owner businesses go back to the 1960s, but the stats on incorporated single-owner businesses don't show any significant change over the last 10 years, so it seems hard to argue that Americans are really more entrepreneurial now and those numbers just aren't catching it.

learc839• 15 years ago

Do the stats on incorporated business include LLCs?

trunnell• 15 years ago

Technological progress should cause increasing economic inequality

Is this view at odds with mainstream economists?

I believe the mainstream view is that technological progress is a tide that should naturally lift all boats.

lukesandberg5• 15 years ago

The common view is that 'economic growth' is a tide that lifts all boats. But unfortunately its lifting some boats much faster than others.

jgesture5• 15 years ago

I think the argument is that technology is great for the people who use technology.

If every programmer and engineer got paid $500,000/yr, that would be great...for ever programmer or engineer, it wouldn't matter much for others.

I do tech support for a web hosting company and I've definitely seen people with low incomes who don't and don't want to use technology, they are falling behind.

jshen• 15 years ago

"it would strain the fabric of the organization to reward people that way."

This is so true, and I also think the fabric of our society will be strained as the gap grows. Especially when the offspring of these highly productive people begin inheriting enormous sums. Maybe a larger estate tax is a good counterbalance.

buff-a3• 15 years ago

I don't believe the problem is economic inequality. It does not matter if the rich get richer. What matters is that the poor are getting poorer in absolute terms: how much they have to work in order to make rent, buy food, enjoy a vacation. I do not believe that the poor would even notice how many private jets the rich have if they had food on the table. A staggering number do not.

InclinedPlane3• 15 years ago

The poor are not getting poorer.

In absolute terms real income for the bottom quintile has increased. In addition, technological progress has drastically reduced the cost of many luxury items and put them in reach of the poor. Today the "poor" in America not only have clean drinking water and electricity they also have cell phones, internet access, large screen tvs, dvrs, cars, refrigerators, dish and clothes washers, etc. In short they have the ability to live at a much higher quality of living than in any previous era.

Sure it sucks to be poor, believe me I know, but let's not kid ourselves into thinking that the developed world is devolving into some dickensian nightmare when nothing of the sort is happening.

Edit: a helpful graph: http://en.wikipedia.org/wiki/File:United_States_Income_Distr...

watmough3• 15 years ago

This really interesting, and somewhat depressing at the same time. I also remember the 'big-bang' in the UK, and the rise of the yuppie, "loads-a-money" types etc., which corresponded with the start of my working life.

A few years ago, I had some contact contracting in a large corp., and it was quite a feat to adjust to the life 'inside', where to be quite honest, life was a good bit slower, with a largely out-of-sight board, and dictates coming from on-high.

The take-away for me, is that not everyone is a Paul Graham, or a Zed Shaw, or a fogus, and that if you support the overall welfare of the country, then we should also support the population at large with reasonable roles that can support them with a living wage.

If we don't do this, and we haven't been, then the consequences of a giant unruly, unhappy and active underclass await.

jholman• 15 years ago

It saddens me that you introduce the straw man of the zeroth percentile, "firmly anchored at zero". It wasn't in the linked article, which only talked about quintiles, none of which are anchored at zero. And with respect to these statistics, clearly someone taking an unpaid vacation is not in the class "production and non-supervisory workers".

I have little problem with inequality. I do think there are some downsides, like the threat of violent revolution, but my point is that I'm not making some hobgoblin of wealth or income inequality. I don't really care whether 20% of U.S. wealth is controlled by the top 1% or the top 10%.

But it does strike me as a little troubling to see -4% gains for the bottom percentile over a period of 80% increased productivity (taking those stats at face value).

monopede• 15 years ago

There is an interesting book, "The Spirit Level: Why Equality is Better for Everyone" by Richard Wilkinson and Kate Pickett, that makes a very strong argument that in developed countries inequality is correlated pretty much every "bad" metric (health, crime, teenage pregnancy, etc.) of a society.

Now, of course, correlation does not mean causation and it's perhaps more interesting what the true underlying causes are. But if inequality is such a strong indicator, it is worth wondering whether inequality isn't a bad thing in itself.

nhaehnle6• 15 years ago

As a US citizen you may not be aware of this, but the time between 1970 and 1980 was also when full employment was effectively abandoned as a policy goal in most Western countries.

In countries like France, Germany and Australia, unemployment was constantly below 4% for many decades after WWII, even below 1% in many cases. What's more, rises in the unemployment rate due to recessions were quickly and successfully fought using fiscal policy. In fact, such policies where quite consciously implemented after WWII even in countries that did not see large scale destruction, because the consensus was that returning soldiers needed to be given employment to avoid social problems.

Unfortunately, low unemployment meant better bargaining positions for workers, and so getting rid of this "problem" was quite openly discussed for some time (this was documented in a PhD thesis, http://bilbo.economicoutlook.net/blog/?p=11941). Economic troubles in the 1970s helped convince people that something needed to change and made it easier for attitudes towards economic policy to be changed, i.e. the shock doctrine. Thatcher in the UK was probably the most memorable driver of this change with her very open fight against unions.

It seems to me that a nice test of which of the two explanations fits the bill better is to compare the development to countries in which those measures of inequality, unemployment, and decoupling of real wage from productivity increases did not change at the same time as in the US.

Was it because the large corporation developed differently, or was it because those political shifts happened at a different time?

notahacker2• 15 years ago

In fairness (in the UK at least) the decoupling of unemployment and inflation occurred in the 1970s well before minimising unemployment rates ceased to become an objective of government policy at the end of that decade. Exogenous shocks like oil prices and trend decline in the competitiveness of (UK) manufacturing helped drive this.

Thatcher's shock doctrine may have had many flaws of its own but the abandonment of targeting unemployment via monetary policy was preceded by the previous administrations' failures to actually achieve their unemployment objectives.

Roboprog5• 15 years ago

Was it only 10 or 12 years ago that Alan Greenspan was worried that the national debt might actually be paid off, which worried him? I bet he sleeps soundly now.

God help me if any of my children want to become economists.

Steko2• 15 years ago

"So the interesting question is not why economic inequality is increasing, but why for a few decades in the mid twentieth century the trend was reversed."

Or maybe why even today, other countries have reversed that tendency.

And the answer to that question is pretty simple, progressive taxation.

cHalgan• 15 years ago

I actually believe that lack of democratic institutions and lack of regulations is enabling rich (either rich by inheritance or self made) to become more rich.

I'm not sure how large corporation has influence to this because at least, in Eastern Europe, raise of inequality (tycoons and such) goes hand in hand with lack of democratic institutions (sometime outright corruption but in many cases everything is "legal") and lack of regulations.

Unfortunately, regardless of reason of increasing inequality, history showed us that inequality is often fixed by events which are not part of capitalism teaching (revolution, war, crazy people end up leading the country).

Hyena6• 15 years ago

This presumes that only the "top end" has access to those levers. That's only true through the patent system and, incidentally, Dean Baker points out that the patent system is a good predictor of inequality.

So levers for me, not for thee has precisely the result we would expect. Fascinating.

jonmc12• 15 years ago

"while technology gives the top end ever more powerful levers"

Technology can create entirely new ways of delivering value and generating income, it can multiply income and it can eat existing income streams.

Inequality is not such a bad thing if technology is the vehicle of economic mobility. Technology can act as a enabler in both directions of income generation.

However, when wealth or power or technology prevent economic mobility at any level, that is a bad thing. Inequality is not the problem, its access to economic mobility, which presumably means access to empowering technology.

cma• 15 years ago

How about opening trade-relations with China--a country where forming a labor union is punishable with the death penalty--didn't that happen around that time?

joshcrews• 15 years ago

My explanation of the 1947-1979 middle class bulge is the spoils of World War II for the United States. It gained brain power (smart immigrants), oversees market domination, and a premium on capital (other countries capital and people destroyed by war).

Those spoils paid high wages for the US middle class because it needed those workers for its factories and companies. After a few decades the advantages of the spoils of war evened out with other countries (catch ups in capital, education, strong legal systems) and technology for outsourcing and cheap shipping broke up the US middle classes prior monopoly on US factory/company jobs.

OstiaAntica5• 15 years ago

Indeed, it was U.S. policy to distribute the spoils of war. America created the Marshall Plan, the global trade, finance, and legal arrangements, and generally encouraged other countries to catch up.

It was a selfless policy, perhaps unique in world history.

bd_at_rivenhill• 15 years ago

I wish I could upvote this more. It constantly astounds me that people construct elaborate theories about the decay of morality amongst the elite of America when faced with such a powerful supply/demand argument. It's pretty simple really: the industrialized nations spent tremendous resources over a span of about 7 reducing each other to rubble. At the end of it, they wanted to rebuild, and the only country with industrial capacity remaining was the United States. Furthermore, the process of rebuilding was extremely labor-intensive, involving construction and manufacture of durable commercial and consumer goods in an environment with low automation. To top it all off, when the other nations were finally rebuilt and started to be competitive again, the size of the available labor pool simultaneously started to expand as women entered the workforce. The middle-class American dream was the result of a global labor market anomaly that lasted for several decades, which was long enough to convince everyone that it was the new normal, and the long decline since the late 70s was the result of that anomaly ending.

Steko2• 15 years ago

"I think the key to the answer is the large corporation. The period of flattening coincides with the heyday of the large corporation.

Large corporations tend to decrease economic inequality. "

I think this is off the mark. This time period corresponds directly to the rise of the financial industry which is mostly independent of firm size.

dogwelder3• 15 years ago

I'm inclined to agree. It's striking how the graph showing the wealth flow to the top 1% correlates with changes to the capital gains tax rate. There are benefits to a low cap gains rate, but below a certain level, it seems associated with slower growth, more of the income flowing to the top, and more volatility and crashes.

You can make the argument it's goosing the economy to concentrate more and more capital into a single point of failure, a deeply interconnected network of financial firms. And you gotta wonder what the economy would look like, if Wall Street hadn't been siphoning off so much of the brains and capital to play card tricks. It might otherwise have gone towards, say, innovations in healthcare, transportation, energy, even domestic manufacturing.

rmc• 15 years ago

I thought the financial industry started in Amsterdam in the late 1600s? What happened between 1700 and 1950?

Florin_Andrei2• 15 years ago

> What happened at the end of the 1970s...

...was that "reaganomics" took over after that.

doki_pen• 15 years ago

Maybe that is why, maybe it isn't. The problem is, when most of the population doesn't have disposable income, it makes it much harder to go out and make money in a productive way. Of course, there is always scamming. That works in any economy.

msellout2• 15 years ago

It is far from certain that technological progress was the cause of the increase in inequality. There has been much study on this question--why inequality--and the results are inconclusive. Unfortunately, I don't have the links to back it up right now, but I suggest that you look into the academic literature before coming to a conclusion on the cause of increasing inequality.

bluedanieru• 15 years ago

How do you reconcile this with control of political processes? Vast differences in income between the rich and the poor could lead to a huge gulf in influence over the government and, sure enough, exactly that has happened in the States. And, what do you think of indications that increased income disparity leads to decreased quality of life across the board, for rich and poor alike?

Moreover the bottom end of the scale isn't anchored at zero even in the US.

kb101• 15 years ago

"Technological progress should cause increasing economic inequality" is a bold statement. Presumably, increasing productivity for everyone is one of the signal benefits of technological progress. If we accept that as true, then why can we not say that technological progress is agnostic as far as economic inequality is concerned?

Many of the arguments about economic inequality in this thread seem to be predicated on the notion that we are talking about comparing salaries or car brands. Don't be jealous of your neighbor for having a higher salary or a better car, and why should he have to give up more of his money via taxes just to enhance your lifestyle... seems to be the gist.

But income inequality is rooted in the question not of does your neighbor have more goodies, but how do we divide the spoils of our shared enterprise. If you and your neighbor are partners in the same firm, and you are working your ass off so that he can ride around in a Benz, things are a little different.

It is interesting to observe that when this argument is couched in terms immediately relevant to most of the posters here, the response on HN is quite different. I.e. "I have a great business idea, I just need someone to code it for 1% of the business equity". There are markedly fewer posters defending this notion, or condemning the hacker who wants a bigger share as exhibiting some kind of perverse socialist urge toward income redistribution, than there are posters in this thread defending the same notion expanded to society as a whole.

zallarak• 15 years ago

"Technological progress should cause increasing economic inequality, because the bottom end of the scale is firmly anchored at zero (someone taking a vacation), while technology gives the top end ever more powerful levers." - does an increase in the range of possibilities necessarily imply a larger gap? What if technology causes the range to widen, but the average gap to lessen. Not sure if its true or not, concrete data on this would be interesting.

beefman2• 15 years ago

The bottom end of the scale isn't fixed. A person taking a vacation in 2011 adds more value to society by doing so than someone taking the same vacation in 1950.

Lagged2Death• 15 years ago

What "scale" are we talking about, and why ever would it be "firmly anchored at zero?" It's perfectly possible to have a negative net worth, a negative cash flow, a negative effect on the wealth and well-being of the society in which you live, etc.

What technology does "the top end" have access to that others don't today? Cell phones? Web servers? Technology has always been influential in proportion to its cheapness. And it's all really cheap now.

If a vacation works and recharges your batteries, it's not, in the grand scheme, a zero-productivity interval, is it?

I think the key to the answer is the large corporation. The period of flattening coincides with the heyday of the large corporation.

Large corporations are still around and arguably more powerful than ever. Yet the difference in pay between the top executives and average workers in those corporations is one way the growing gap between the rich and the not-rich is illustrated and measured.

I think this says a lot more about how children's view of the world around them evolves as they grow up than about actual changes in the American business landscape. America has been the land of entrepreneur-worship for a long time. John D. Rockefeller was working for himself from the start.

eru• 15 years ago

> Technological progress should cause increasing economic inequality, because the bottom end of the scale is firmly anchored at zero (someone taking a vacation), while technology gives the top end ever more powerful levers.

We measure inequality of income not in absolute dollars but as ratios. So the anchoring at zero doesn't make a difference.

scarmig3• 15 years ago

The first graph is the most interesting. Productivity has increased substantially while wages have remained relatively stagnant. More of the surplus value of labor has been accumulating to capital.

This means that people who get their income primarily from labor have lost a great deal of power vis a vis those whose income comes disproportionately from ownership of capital.

Questions and some guesses: 1) Why is this? If labor can extract less value, that would suggest that it has less bargaining power. That is, labor is more fungible. This fits in with what we experience as developers: one of the great emphases that (successful) companies place is on making developers replaceable and their labor roughly equivalent, through an increased emphasis on frameworks and general languages. It also makes sense for less professionalized labor. Heavy industry requires skills to operate effectively and runs the risk of shutdowns at centralized production facilities, while services and light industry are much easier workplaces to dominate workers.

2)How do the unemployed and underemployed fit in? This is complicated, as women have entered to workforce to make two-income households, while zero-marginal product men have left it as they cannot be employed profitably.

3) Was the threat of communism an enabling force for the middle and working classes in the "good times" leading up to the 80s when it finally started to crack and fall? Before the ruling class in the United States had to optimize the economy to be as effective as possible against the threat of Communism. This meant sacrificing some of its own well-being to buy off the rest of our consent for the ability to play a major role in geopolitics ( this buy off taking the form of concessions to unions, more forceful labor market interventions, healthcare, investments in public education).

4) Could the increasing inequality somehow be a statistical artifact? Smaller countries tend to be more egalitarian than richer ones. Most individual countries in the EU and states in the USA have a lower Gini coefficient than the EU or USA as a whole. Could a similar mechanism cause a larger and more sophisticated economy to feel pressures to become more unequal?

Its tricky to simply blame it on USA policies, as most Western countries have also become significantly less egalitarian than they were in 1970. Which isn't to say that US policies didn't cause it in the USA; it's just that those policies didn't appear in a vacuum, and you've got to identify the forces that caused it around the world.

Hyena6• 15 years ago

The main problem statistically is how we account income. Generally the employer-paid health insurance and other benefits are not included, even though these can often vastly increase total compensation. Scott Winship did a good job following this but tends to shade into triumphalism.

scarmig3• 15 years ago

At least the top graph about productivity refers to "overall compensation."

I don't have a chance to find the original source for the numbers, but unless the graph has been grossly mislabeled, benefits are probably included.

boredguy8• 15 years ago

Funny, I was just in a discussion with some folks on this very issue, so enjoy the citation bomb. In short: total compensation isn't outstripping productivity by a substantial degree.

First, start with "The relative stickiness of wages and prices" by David E. Spencer. http://findarticles.com/p/articles/mi_hb5814/is_n1_v36/ai_n2... It provides important background to the discussion of whether wages or prices 'stick' more, and provides an overview of the debate through '98.

Next, we turn to Martin Feldstein's paper, "Did wages reflect growth in productivity", 2008. http://www.nber.org/papers/w13953 He highlights two common errors with studies that find wages rose substantially slower than productivity. First, he explains that such studies focus on wages rather than total compensation. Without comparing productivity to total compensation, such studies are dangerously flawed. Second, such studies tend to poorly select the deflator when comparing productivity & compensation. Basically, the price index that's used to determine compensation is different than the price index used to calculate productivity.

For an even more recent discussion of the same problem, but within the context of Russia's economy, read "Productivity and Cost of Labor: How Statistical Illusions Are Born" by R. Kapeliushnikov, May '10 http://mesharpe.metapress.com/index/BW00W218X2143504.pdf. He explains:

  It seems that many of them are unaware of the difference between the 
  producer real wage and the consumer real wage. The former is estimated
  by deflating the nominal wage using the producer price index (PPI) or 
  the GDP deflator; the latter, by deflating the nominal wage using the
  consumer price index (CPI). One reflects the change in the price of 
  labor from the perspective of firms; the other, the change in the pur-
  chasing power of wages from the perspective of employees. Therefore, if 
  we want to answer the question of how expensive or cheap labor is for 
  firms, we should use the producer real wage, not the consumer real wage.

Hopefully this helps in evaluating the claims made by the EPI (the source of the data used by the NYT). I'm not familiar with any direct responses to their latest data, but Feldstein reaches a different conclusion over much of the same time period: While there's some lag in total compensation, it's not dramatically different than the rise in productivity.

illumin83• 15 years ago

The attached graph clearly shows the difference between wages and total compensation.

gwern• 15 years ago

Yeah, it clearly says 'wages and overall compensation'.

nhaehnle6• 15 years ago

We're talking about the first graph, right? If your "statistical artifact" point is to have any merit, then you would have to demonstrate that something changed significantly in how those statistics were obtained after 1980 - because that's when the behavior of those time series changes significantly. If you cannot do that, then the other theory - namely, policy changes - seems the far more plausible explanation.

mkramlich• 15 years ago

One bite-sized takeaway: own a company, don't be an employee.

shithead2• 15 years ago

"""

Another thing to consider in terms of whether the rich “deserve” their money, or whether those rewards belong to the society that bestows them is the consolidation of labor. Consider Oprah Winfrey. She s probably only marginally better than the next best candidate for talk show queen. Yet she has amassed 100′s of millions while the next bes candidate for her job has no such job at alll. So we have two people, one tha is maybe 5% better at being a talk show queen, her income is 100 million, and another, 5% worse, and her income is some middle class wage like 50,000. Because of consolidation, the society only needs one Oprah Winfrey. We are paying 100 million to the role, not the woman. That’s the key point. She herself is worth 50,000 plus 5%, and the role of talk show queen, which could have been filled almost as well by many, many other people, is worth all the rest of the money. That role belongs to society, not to Oprahe Winfrey.

You see the same thing with CEOs, bankers, and others where consoliated and mass production allows only a few highly productive roles. The wealth associated with those roles, which is to say the consolidate dower, belongs to society not to the individual lucky enough to get to fill the role. This is why tax rates of 91% on the few that occupy the most consolidate roles was thoroughly appropriate and part of an economic approach that led to America’s greatest period of growth and general prosperity. High taxes on those who wield societies greatest powers on behalf of society are normative. The power, the influence they wield belongs to the society that allows and enables it, not to the individual who fills the role.

"""

[ comment by 'Sharn cedar' on 'DEAR RICH FOLKS: Get Ready For A (Tax) Revolution In Which Your Money Will Be Taken Away', http://www.businessinsider.com/tax-increases-are-coming-2011... - sic, a few typos uncorrected ]

solutionyogi• 15 years ago

Wow. Obviously, if you are not Oprah, you would want to think that she is only 5% better than the next best candidate. I am sure others disagree. What if you apply this to other fields e.g. Steve Jobs is only 5% better than next CEO? Does it make sense? I think this is a nonsense approach to decide how to tax someone.

shithead2• 15 years ago

Wow. An unfamiliar thought. Masterfully repealed, though. Not very logically, but hey, so what. All is well.

kevinpet3• 15 years ago

"debt exceeded income in 2001"

I read until I find a fundamental error like comparing two values with different units. Only if it doesn't make any fundamental errors do I consider whether it's valid or makes any subtle errors.

ianferrel3• 15 years ago

Aren't debt and income both denominated in $? What's the other unit?

kevinpet3• 15 years ago

One is in dollars, the other in dollars per time unit.

michaelochurch• 15 years ago

Short story of American inequality:

The economic growth since 1978 was, for the most part, produced by the efforts of 10% of the population. It's true. I'm a leftist and I must admit that. That's not to say that the other 90% aren't working hard and don't deserve to share in the gains-- they obviously do-- but those gains are coming from a small percentage of people. Many, many people work hard and deserve to have good lives for their contributions, but only a small percentage (about 10%) have the vision and creativity to push increases in productivity; most are adders, few are multipliers. (Many politicians are dividers, but that's another story.)

The gains since 1978 have also gone to about 10% of the population. Maybe less than 10%. Income gains are often offset by increased prices in the Unholy Trinity (housing, healthcare, education costs). Quality-of-life is also going down in most of the country, and where it is increasing, housing prices are absurd even now. Even people whose incomes appear to be growing may be back-sliding. 10% is generous, but let's go with that.

These 10%'s are not the same people. (Sorry Randists). There's an intersection, but it's only about 2-3%, or 20-30% of each. The first set are the creators of wealth; the second set are capturing it. Startup entrepreneurs are in the first set (and if lucky, can enter the second). Well-connected rich kids who get staffed in private equity firms at 24 and get to draw fees from economic activity regardless of success or failure (because they'll get promoted anyway) are in the second set.

Speaking as a member of first set, and merely on the outer fringe of the second, I'll just say this: no, the economic inequality in the U.S. is not desirable. Hard-line egalitarianism is ridiculous and impractical, but inequality has gone too far. We know this. The only reason the absurdity is tolerated is that 10-30% of the American population has insane social and religious views that impel them toward degenerate politics.

Anyone who has traveled within Latin American societies at all can see where we're heading, and it's not pretty: massive economic inequality, desperate rural poverty, and intractably corrupt, plutocratic governments.

I'll admit that what bothers me most about American equality is what drives the inequality. If it were reflective of differences in intelligence, the correlation (slight, but positive) between intelligence and empathy would be enough to impel this smart-and-rich elite to give back to the rest. At least, I hope that is the case. But that's not what we have. Increasingly, the inequality comes from inherited social connections (social capital, mostly implicitly generational) and, as it increases, the decision-making elite becomes more insular. That's what most elites become (generational social networks, not meritocracies) and that is how societies rot.

lukesandberg5• 15 years ago

>The economic growth since 1978 was, for the most part, produced by the efforts of 10% of the population

I don't see how that could be true. productivity gains have been experienced across all levels of the income scale so surely that growth is attributable to more than just the top 10%. Just because that's where the most income growth has been doesn't mean that that is where the growth has been produced, its just where it has been captured.

I think you are right in questioning what drives the inequality. I do believe that some people are more productive and thus deserve additional income and wealth. But i am not so sure that the amount of additional income that the very wealthy earn is actually proportional to their intrinsic productivity. The issue is that capital tends to create more capital because you can 'put it to work' so the wealthy tend to become wealthier. So the rich will naturally become richer because they have access to greater growth opportunities (though investing for instance they can capture growth produced by other companies).

Capitalism fundamentally favors people with excess capital. This is what makes it very effective and efficient because it encourages risk and investment. however it doesn't necessarily produce a fair system because the owners of capital have many means to capture and retain the returns of investment.

For example if in the proverbial pin factory innovations were made that allowed workers to be more efficient (say by specializing different aspects of the production of the pins) then all of a sudden the factory is more productive relative to the labor invested. Now the question is who should capture the gains of that productivity. Should it be the factory owner because he/she put up the initial investment, the factory workers because they are now more productive, the person who came up with the innovation? It's not really clear but i think most people would agree that they all deserve some share of the additional profits. The shift over the last 40 years has been that mostly its going to the owner (the capital investor) and the innovator and not the worker. It's tough to determine exactly how the profits should be divided fairly, because fairness is so complicated in this instance. This is one of the major benefits of labor unions because they provide a way for the workers to share in the additional wealth that they are helping to create. Now obviously not all occupations should have unions and not all unions are effective, but this is the problem to which they are the solution, but you have to admit that its a problem first.

babblefrog2• 15 years ago

I suspect that supply and demand have a lot to do with it. Capital and innovation is scarcer than labor, especially unskilled or lower skilled labor.

yummyfajitas6• 15 years ago

I don't see how that could be true. productivity gains have been experienced across all levels of the income scale so surely that growth is attributable to more than just the top 10%.

This statement betrays a misunderstanding of how productivity is defined. There is no macro-level measure of individual productivity, so it's simply not possible to determine which levels of the income scale experienced productivity growth.

Productivity is only measured, in the most granular cases, at the organizational level. The data available simply cannot determine which workers are more productive.

I'll give you an example. My startup involves a lot of categorization - we get a data feed full of poorly labelled fashion items, and we have a team of 6 girls categorizing them (item 1 -> "Handbags", item 2 -> "Dresses", etc). At the macro level, my organization recently increased categorizing productivity by 1000% (i.e., we categorize 10x more items than before).

This didn't happen because my girls suddenly started clicking 10x faster. This happened because I wrote a program which can parse item names ("Marc by Marc Jacobs sleeveless shift dress" -> "Dresses") with about 90% accuracy [1].

Macroeconomic statistics have no way of knowing which worker to attribute this productivity gain to.

[1] Categorizing natural language is surprisingly hard - stuff like "dress shoes" and "swimwear top" confuses the matter tremendously. Some items also get names like "Cherry Pie"...

Hyena6• 15 years ago

If only 10% of the population is driving economic growth, that would indicate an intense resource problem. Doesn't it seem plausible that we should seriously consider the possibility that somewhere around 1973 our essentially 19th century system of economics became obsolete and so was unable to drive much growth?

brycecolquitt2• 15 years ago

>Increasingly, the inequality comes from inherited social connections (social capital, mostly implicitly generational) and, as it increases, the decision-making elite becomes more insular. That's what most elites become (generational social networks, not meritocracies) and that is how societies rot.

Another thing this thread seems to be missing is that these inherited social connections are most definitely divided along racial lines.

leot4• 15 years ago

There's an assumption here that being richer just lets you buy more stuff and services.

Wealth, however, is power. While Bill Gates may be no more capable than me at driving faster on the 101, I definitely can't pay a lobbying firm 10 million dollars a year to make sure government policy serves my interests, or secretly pay to have lies told in support of my cause by dozens of seemingly credible people.

Some proportion of people are going to be unethical, and there are > 400 billionaires in the U.S.

The conveniently ignored problem with rising wealth inequality is the power imbalances it creates, and the strong reinforcing feedback loops it enables.

[edited to fix typo]

philiphodgen• 15 years ago

I'm sorry, but there seems to be an omitted first step in the entire comment thread of critiques -- from all comments coming from all political angles: examining the underlying data.

The NYT graphic tells a terribly compelling story that supports a particular political point of view. That tickles my bullshit sensor, and tells me it is time to question the underlying data and assumptions.

Frankly, this graphic makes me hear the sound of ideological axes grinding. That makes me want to question assumptions, data gathering, and data analysis. This is all thanks to Prof. Eyrich and his Stats and Econometrics classes way back when. (w00t Claremont McKenna College.)

I am not saying the graphic is wrong or it is right in the conclusions it suggests. I just find it telling that the discussion thread jumps straight to an Itchy and Scratchy Show level of discourse, without questioning the underlying data.

Where is HN's passion for analytic rigor? Or does A/B testing and statistical analysis apply to websites but not economics?

william424• 15 years ago

It's kind of hard to A/B test an economy.

darrenkopp• 15 years ago

We're pretty good at it now. A=Republicans, B=Democrats. We switch every couple of election cycles and see how it goes.

jberryman3• 15 years ago

> I am not saying the graphic is wrong or it is right in the conclusions it suggests. I just find it telling that the discussion thread jumps straight to an Itchy and Scratchy Show level of discourse, without questioning the underlying data.

So then tell us what's wrong with the data. I assume most people didn't question the data because income inequality since the eighties is rather well documented.

That you would call the data into question without providing any justification suggests you have some ideologies of your own.

sesqu• 15 years ago

While the political story did raise a few flags, that's not what most makes me want to look at the data.

What really surprised me is that both main trends are linear. I presumed both productivity and wages would be exponential. I can believe that the wages are inflation-adjusted, though I saw no mention of this (except in the quintile section), but that productivity would have the same base is unexpected.

Spyro7• 15 years ago

Since this is Hacker News, and there are a lot of really smart, numbers-oriented people here, I just thought I'd provide a link to a dataset that looks at income distributions within the US from 1913 to 2008:

http://www.econ.berkeley.edu/~saez/

Under "Income and Wealth Inequality" on that page, click the link titled "(Longer updated version published in A.B. Atkinson and T. Piketty eds., Oxford University Press, 2007)".

It is an excel file that contains a metric ton of tables, charts, and figures. If you have a few moments and want a deeper understanding of the issue, that excel file is the best place to go.

(Edit: I just wanted to note one thing. My favorite graph from the excel file is figure 1B, where you can see that we are basically returning to where we were prior to World War II. It makes you wonder what was so different about the post-war period that resulted in this shift. Personally, I wonder if the sudden subsidization of education for returning veterans had anything to do with it, but I have no data on this right now, so...)

As far as my own thoughts on the issue go, I agree with pg. For a boring, academic take on it, there is a wonderfully dry 1980s paper by Rosen outlining the superstar theory:

http://www.ppge.ufrgs.br/giacomo/arquivos/ecop72/rosen-1981....

Basically, thanks to technology and globalization the rewards to individuals that have the highest levels of abilities have been magnified. Their "reach" has increased relative to those below them, and their rewards have increased in line with this.

While interest in this seems to be popping up all over the place due to the current economic catastrophe in progress, the idea that communications infrastructure improvements lead to income inequality is an old one.

Here is Alfred Marshall (founder of neoclassical economics) in 1890 (revision from 1920):

http://www.econlib.org/library/Marshall/marP54.html#VI.XII.4...

As for myself, I have no idea about whether this is a good thing or a bad thing (or whether anything could/should be done about the growing inequality). However, it is happening now, on a grand scale, so I think that it is important for everyone to have some context on the issue.

akeefer• 15 years ago

There's one question, regardless of if you believe this is "fair" or not, around whether structural inequality at this level is harmful to society regardless of fairness. I tend to believe it is, based on historical precedent of what happens in highly unequal societies (it tends to not be good), but that's a separate question from the one about fairness.

To analyze whether this is "fair" or not, I think the best perspective there is Rawls's framework, which is the maxi-min idea. To summarize, the idea is that inequality is okay to the extent that it improves the minimum position. For example, if you start out with some totalitarian society where everyone makes $25k, it's okay for someone to start making $200k so long as it doesn't mean that someone else now makes less than $25k. Economically, that comes out as something like: it's okay for the top end of the wage spectrum to increase because they're producing more value and capturing that value for themselves. It's not okay for them to increase because they're capturing value that other people are creating instead. If someone making $500k starts making $1MM because they're producing $500k more in value, that's acceptable. If they do that and they're only producing $300k more in value, and the other $200k increase is coming from other people's productivity increases, then that's not "fair" and shouldn't be acceptable.

So, which one is it? Does anyone have a compelling argument? In the financial sector, for example, I think it's pretty easy to argue that it's the latter: people who privatize gains and socialize losses are enriching themselves far out of proportion to the value they create. When it comes to startups and new businesses, it often works the other way, in that the person starting the business, even if they become hugely wealthy, does so by creating even more value than they capture. I'm not sure it's obvious if what's been going on for the last 40 years is one way or another.

Hyena6• 15 years ago

First, it doesn't control for increasing health costs. Employer-provided health plans have seen large amounts of cost growth and this depresses wages, for which they substitute. This is better than the raw story.

Second, much of the top quintile gains have come out of the financial sector. You can see this in evidence by looking at the huge volatility in income through boom/bust cycles. This is bad.

Third, we're in a lopsided labor period where lots of low-end labor is available but labor capital production is actually quite low. This puts upward pressure on the price of higher value labor capital but downward pressure on raw labor capital. This won't continue as it's a byproduct of peculiar historic issues (namely communism, etc.).

Fourth, the information technology revolution has so far failed, I suspect for generational reasons. We've automated lots of low-end clerical jobs at large firms but that's pretty much where IT stalled.

In technology companies themselves, this doesn't appear to be an issue and technology seems to increase employment. It also tends to encourage additional technical fluency, which is then rewarded. But outside of technology itself, this pattern doesn't seem to hold. I suspect culture play a role here.

Florin_Andrei2• 15 years ago

It's hard to ignore the thought that the inflexion point and the beginning of the Reagan era coincide. I try to push the thought away, but it keeps coming back.

sparkycollier2• 15 years ago

The more relevant question in this global age is: what are the global stats? How many people were lifted out of poverty during these "bad" decades on a global scale? Country specific stats just don't mean as much as they used to.

vishaldpatel• 15 years ago

I have a simple theory, which is well.. simple: - Most people look for paid work when they need the money. This puts them in a position where they are unable to negotiate a market wage. This adds tremendous downward pressure on wages and keeps the middle-class down.

mckoss• 15 years ago

If you can invest capital to increase productivity, demand for labor goes down, and wages will be kept down.

The only way to increase wages is then to proportionately increase demand for goods and services so that, despite the productivity gains, there is an increasing demand for labor.

We are also seeing automation (capital) and (cheap) overseas labor substituted for domestic labor beginning in the 80s. Consumer demand did not keep pace, so wages stagnated.

yason• 15 years ago

So, looking at the charts it seems that since productivity went up, more people should be enjoying more spare time and less work. And to an extent, this has indeed happened despite our resistance: it's just that in our society we call it unemployment and in fact punish people for it, both socially and bureaucratically.

meric• 15 years ago

Until 1975, labor was the most scarce resource. Post-1975, technology was the most scarce resource.

A bridge needs a thousand people to build but the idea of a personal computer only takes one genius to bring into fruition.

jeffdavis• 15 years ago

When looking at quintiles through time, remember that you aren't tracking people through time. That's because people move through the quintiles over time (how much, I don't know, but the groups are not static).

In other words, it could show simply a greater variance in income within individual lifetimes rather than a greater variance in income between people.

For instance, if people spend more time at school, but their incomes a few years after graduation are much higher, that would appear as a quintile disparity because they spent years in the bottom quintile (college and just after graduation), and then jumped into one of the top quintiles.

Similarly, as skills become more important, then (whether you go to college or not), you'll spend more time at low pay before your skill level matures, and then your income will rise rapidly.

Also, income is not wealth. Upper-middle class and rich people often spend a lot of time in the bottom quintile (unless they are so rich that they have a lot of passive income).

I'm not saying there isn't a problem. I don't have the data. But that particular measure is quite deceptive in my opinion.

eurohacker• 15 years ago

the top has had the biggest improvement compared to other groups during the great depression in the 1930-s and during the current recession

thats an indictment of Fed which has probably intentionally caused all of the crisis in the usa in the 20th century , to benefit Fed-s owners - few commercial banks ..

beefman2• 15 years ago

I assume "productivity" is something like real GDP/capita but it would be nice if the graph had units.

The productivity/compensation line conveniently starts in 1947 and makes the post-'70s era look unusual. In fact, the baby boom era was unusual -- with the possible exception of the first industrial revolution in Britain (1700s), it is without precedent in history. Two underlying factors are responsible: 1. the destruction of all other industrial nations in WWII (and consequent international demand for the dollar), and 2. cheap energy.

In 1947 the US had the world's only intact industrial infrastructure. This created tremendous overseas demand for our goods and our currency. As reconstruction abroad rapidly succeeded, the demand for the latter began to outstrip demand for the former, and we were all too happy to supply Eurodollars to meet it. By 1972, foreign claims on US gold reserves were totally unsustainable and Nixon unilaterally ended the Bretton Woods agreement.

Lightning struck twice on our shores with a sustained period of unbelievably cheap petroleum, which also ended in the 1970s. Recent work in thermoeconomics suggests that technology improvements are deflationary unless society can increase its gross energy consumption. Today's ICs are thousands of times faster than those of 1980, but they do not cost more. This is an efficiency improvement - a deflationary effect. (This deflation is largely missed by typical macroeconomic measures, which don't handle "hedonic" change well. The classic demo is to let people spend inflation-adjusted dollars in a catalog from 1980, and one from 2011. Nobody buys much from the older catalog.)

Building tract homes by the millions, on the other hand, requires increased gross energy consumption and is therefore monetized and reflected in measures like real GDP/capita. A similar issue exists around funding for "R&D". You can only fund the R. Since 1980, there's been an outright explosion in the number of scholarly publications disclosing promising breakthroughs, but breakthroughs can't penetrate society without energy. They sit on the page.

Today, we are a people harboring postwar expectations in a world of global competition and expensive energy. President Obama's recent speech was, like many he's given before, a populist appeal for a protectionist return to postwar conditions, when a high school diploma and a pulse could confer property ownership. Such measures cannot succeed.*

One of the most important roles of government in industrial society is to subsidize the production of energy. For the past 40 years, our government has sat idle (or even enacted counterproductive policies) while the real cost (EROI) of our energy sources has skyrocketed.

A common claim in connection with such graphs is that changes around 1980 are due to tax policy. I personally favor progressive taxation (and models suggest it can help with income inequality) but to suggest that tax policy is solely responsible for changes seen since 1970 is ignorant at best. And such claims are seldom accompanied by notice that all income quintiles (and all races) have marginally higher real income today than at any time in the past (effects of the great recession aside)... a moderately reassuring fact that would be left out only by someone attempting to tell a story. Psychologists know that income inequality has real, negative effects, so we should try to address it. But we mustn't do anything that would disturb the modest Pareto growth we have.

* Greenspun's comments on Obama's speech are also excellent: http://blogs.law.harvard.edu/philg/2011/09/08/obamas-speech/

Share of Income Gains by Quintile - Great Depression til Now

Related Stories