History of income inequality in the US

http://www.slate.com/articles/news_and_politics/the_great_divergence/features/2010/the_united_states_of_inequality/introducing_the_great_divergence.html

by antoviaque • 14 years ago

54 85 14 years ago

slate.com

Qweef• 14 years ago

here's richard wilkinson talking about why income inequality is toxic

viggity3• 14 years ago

I'm so sick of people who think that wealth is a zero sum game. It, unequivocally, is not. The fact that Bill Gates has $50 Billion, does not mean that poor people are some how worse off because of it. In fact, it is quite the contrary, poor people, rich people, all people are better off because Bill Gates and Microsoft brought computing to the masses, yielding untold magnitudes of increased productivity and more affordable goods of every stripe. Can anyone look me in the face and say, the world would be worse off if there were 10000 Bill Gates in the world? It is time to destroy this myth.

akie• 14 years ago

He's not saying that it's a zero sum game.

He is not denying economic realities, he is not denying the right for people to be rich, or to become rich, or to aspire to become rich.

He's just saying that a small amount of people helped themselves to a (too) large piece of the pie, and he tries to understand how we got there and whether or not this is a bad thing.

Roybatty• 14 years ago

He might have not said that it's a zero sum game, but you effectively did - "He's just saying that a small amount of people helped themselves to a (too) large piece of the pie"....pie being the keyword here

viggity3• 14 years ago

who cares what percentage of the pie someone has, it matters how big the pie is. Suggesting or alluding to redistribution of wealth will inevitably shrink the overall size of the pie.

tomjen32• 14 years ago

Bull. The moment you involve the economic pie, you say it is zero sum. We may call this the pie falicy.

Think of it not as one pie, but as trillions of pies. You get one by buying one or trading others for their pies. Under this model, what right do you have to your neighbors pie.

capisce• 14 years ago

Economic inequality hurts societies: http://www.ted.com/talks/richard_wilkinson.html

jbooth3• 14 years ago

Of course it's not a zero-sum game.

We're a consumer economy. If the bottom 90% are having trouble paying their bills and don't buy as much stuff, the top 10% are going to feel the slowdown eventually. Think of it as your rational self-interest.

As a matter of fact, you know that graph in the linked article, how it shoes that inequality was way lower from 1941-1979? Guess which period of the 20th century had the highest GDP growth.

BTW, Bill Gates was in favor of a higher income tax in WA last time it came up, and as we all know is in the process of giving all his money away.

bhousel• 14 years ago

I'm not convinced that the top 10% sell things to the bottom 90%. We may have a situation where the different wealth brackets operate their own economies that really don't have much to do with each other. (I do agree with your main point that wealth creation isn't a zero sum game, which should be obvious to anyone by now).

philwelch2• 14 years ago

Different Bill Gates. The income tax advocate is Bill Gates Sr., the father of Bill Gates the software magnate.

onemoreact4• 14 years ago

For every Bill Gates there are many people who got rich by extracting a larger piece of the pie vs making the pie larger. Consider 401k's where designed not to maximize retirement income for middle class Americans they where setup so the companies that administer them could extract the largest possible slice of someone other persons pie. Over the lifetime of many plans they extract 20%-50% of all gains though direct and indirect fees. The SSA could administer the same program for literally 1/5th what people are being charged.

Many housing developers get rich not from building houses, but buying land and then rezoning it to be worth more and then building houses. Effectively they leverage an areas existing infrastructure to increase the value of that land without paying for it. And often the way the do this is though direct and indirect bribery of local politicians.

From this perspective the idea of zoning is simply a way for the well connected to make money. If instead you charged people for their share of the construction costs of existing roads, schools, bridges etc when they added a new single family home you could automatically pay for any needed upgrades rather than having existing homeowners subsides their infrastructure either by having already paid for it or sharing in the cost of building new infrastructure to support new immigrants.

Edit: Of course when you start to dig into things Bill Gates also leveraged his connections to make most of his money. The reason he could sell an operating system he did not have to IBM vs them dealing with the guy that created it has everything to do with his connections and nothing to do with him actually building anything.

PS: Often people get rich by doing both. They make a the pie slightly larger yet end up with a larger piece than the size of their increase. I would argue that the best way to separate the wheat from the chaff in this case is a direct tax on wealth say 1.5% per year on anything over 2 million instead of traditional capital gains. While it does little to those who are directly making money it drains the type of passive old boy networks that most damaging to economic growth.

IanDrake• 14 years ago

>The SSA could administer the same program for literally 1/5th what people are being charged.

Most people aren't begging the SSA to manage their money on the cheap, so there must be some kind of benefit with those more expensive options.

However, if you really think the SSA could do better with your money, I know someone who works there and could ask them where you can over send them more of your money.

viggity3• 14 years ago

If some rich people make their money "unfairly" then fix that problem independently, you don't need sky high taxes on all rich people to fix that problem. I make a very good living, but I don't cheat anyone out of anything, and I'm sick of having the specter of high re-distributive taxes hanging over my head.

CWuestefeld2• 14 years ago

Downvote for a boatload of unsupported assertions. Extraordinary claims require proof.

tgrass• 14 years ago

I work in land development and as much as I despise much politically based zoning, zoning is decidedly NOT the source of a developer's profit. Zoning issues may increase the final price of a home, but that difference is not going to the developer, but to me as a civil engineer, and to the planners and to the banks who the developers are borrowing money from and paying interest every month the project sits in planning mode.

locopati2• 14 years ago

Are you denying that wealth has a gravitational effect towards wealth (i.e. it concentrates it) and that effect, when taken too far, has a negative effect on the society in which it occurs? There are plenty of examples from history (distant and recent) and plenty of studies to support the point.

A broader based of wealth occurs when a society is balanced not solely because of the supreme talents of an individual. You could have all the talent in the world but if the infrastructure is falling apart, the educational system is struggling, and there aren't people who earn enough to purchase your goods, what good will it do you?

maratd2• 14 years ago

> Are you denying that wealth has a gravitational effect towards wealth

Money begets more money, certainly.

> when taken too far, has a negative effect on the society in which it occurs?

This isn't possible. A person can either spend money or store money.

When they spend money, they are telling others to perform work. That money then gets transferred to other people.

When they store money, that money gets placed in a bank or in an investment. In a bank, that money is immediately loaned out to someone else, creating a business or some venture, creating jobs and wealth for other people. In an investment, again, jobs are created and wealth for others is formed.

Now, can all of this run in a closed loop among the privileged? Only in a society with heavy government intervention where the market is warped. In a healthy free economy, talented people are quickly recognized and quickly brought into the loop. In an unhealthy controlled economy, you must know the right people to be allowed into the loop and the people allowed into the loop are rarely talented.

> A broader based of wealth occurs when a society is balanced not solely because of the supreme talents of an individual.

From each according to his ability, to each according to his need? History has already condemned your way of thinking.

diogenescynic• 14 years ago

Since we live in a society of auction markets, the more money other people have, in effect, the less you have.

ef42• 14 years ago

That's true for things with a static supply, like famous pieces of art or Manhattan real estate.

But all that new wealth out there bidding against you also represents new wealth out there available for purchase, driving costs down.

Under a stable currency, increasing wealth and productivity leads to steadily falling prices for most goods. This means that other people getting richer can actually benefit you even if you don't. But this process is swamped by monetary inflation.

Lots of people look only at nominal price levels and conclude that inflation hasn't been bad. But when you consider the major productivity gains of the past decades, we should have been seeing falling prices. The real inflation is the difference between these, and it's big, and it makes it harder and harder for the poor to stay above water.

vannevar15• 14 years ago

I'm so sick of people who think that wealth is a zero sum game. It, unequivocally, is not.

It doesn't have to be a zero sum game for income disparity to be a problem. GDP typically grows at less than 5% a year, yet average income for the top 1% has grown at 10% annually over the last 20 years (http://economix.blogs.nytimes.com/2011/09/02/what-does-econo...).

Gormo3• 14 years ago

But, to viggity's point, what does the rate of increase of the average income of the top 1% of earners have to do with people who aren't in the top 1% of earners? If you agree that it isn't a zero-sum game, how does one party being better off imply that some other party is worse off?

nitid_name• 14 years ago

Some methods of wealth creation are positive sum games, like a free market trade between two parties that enriches both. Some are negative sum, like "rent seeking" behaviors.

The problem is that the positive sum creators (e.g. Warren Buffet) aren't as many as the negative sum players (e.g. George Soros).

AlisdairO2• 14 years ago

Any resource in which more cannot be elastically created by the application of more money is a zero-sum game, or close to it. Land is one obvious example.

edit: Political power might be considered another - at least up until the point when you cause people to riot.

Gormo3• 14 years ago

I'm not sure that land fits the bill.

Land can be created, especially if you define land as physical space suitable for human habitation and productivity: technological improvements that render formerly uninhabitable terrain useful can be construed as 'creating' land. Seasteading and space colonization will eventually begin 'creating' land in this fashion.

Technological improvements that allow progressively smaller amounts of physical space to maintain a constant amount of productivity also have a similar effect.

Even in the most literal sense, physical terrain can be created; the Dutch are pretty good at turning sea into land, and in the very distant future, we may be able even to construct entire planets out of dust and debris.

Maybe the supply of matter and energy with which to do these things is a zero-sum game, but not likely one we'll have to worry about any time soon.

benihana• 14 years ago

That last two paragraphs really sum it up: We have no idea why this happens, all we know is that it's really really important because everyone (except for a few crazy libertarians) says it's a big deal. Even people who used to like Ayn Rand think it's a big deal, so you know it's legit.

ajross2• 14 years ago

"People" say it's a big deal, in most cases, because they (or their friends or family) are objectively poorer than they were six years ago. If you've lost your job and are dependent on family, it certainly would be helpful if that family was maybe making more money.

If you're struggling or know people who are, it doesn't exactly seem fair to realize that during the "boom" years (when your income didn't change much) the very wealthy have gotten the equivalent of huge raises.

I don't know which part of that surprises you.

Symmetry4• 14 years ago

Three issues with the piece.

First, its always important to talk about exactly you're measuring. I couldn't find anything in the piece to say whether the numbers being given were individual income or household income. I'm pretty sure these were household income, but then we run into the the problem that richer household tend to be larger, so the individual income disparity isn't as bad as what was in this graph.

Also, I'd tend to prefer to talk about consumption inequality instead of income inequality. The fact that the 1% nowadays pay a lot of that income out in taxes, and the elite in 1915 didn't is something we ought to care about. I think we should all be able to agree that a society with 100% income tax which redistributes all income equally would in fact be pretty equal, but that won't show up on that graph at all. For more nuance you can distinguish between total compensation, taxable compensation, normal income, consumption, and wealth.

A second point would be that they somehow don't mention the big discontinuity from when the 1986 Tax Reform Act passed. That strongly incentivised rich people to report things as income which they had previously claimed were business expenses. That does mean that the numbers after 1986 are more comparable to the numbers from before people started feeling the need to claim that things were business expenses, but it does mean that the numbers from 1988 aren't really comparable to the numbers from 1982. And its hard to compare across countries since AFAIK most of Europe is closer to the pre-1986 US system than the post-1986 US system.

And speaking of Europe, its important to remember than income inequality has been rising at more or less the same rate everywhere in the industrialized world (baring the US's 1986 jump). See pretty graphs here: http://www.scottwinship.com/1/post/2011/03/what-would-it-mea...

So the picture is pretty complex. I think we ought to tax rich people and redistribute the wealth to some extent, but if you just look at these graphs then you'll never see that working.

refurb2• 14 years ago

Great post.

I wasn't aware that the numbers that people throw around concerning inequality were _before_ gov't payments (they basically ignore current redistribution methods).

If you want to listen to a great podcast on income inequality: http://www.econtalk.org/archives/2011/11/kaplan_on_the_i.htm...

The other issue is that the European country that has had the greatest _decrease_ in income inequality in the last few years is Greece. Is that a model we should be emulating?

vannevar15• 14 years ago

That actually works against the argument of US parity, since our tax system is less progressive than most industrialized nations. If you adjust for taxes, US income inequality would look worse, not better, compared to the rest of the industrialized world.

halostatue• 14 years ago

I'm not saying that you're wrong, but my understanding is that higher education levels are positively correlated with income and overall wealth and negatively correlated with number of children. This is where I tend to have a disconnect with your statement that "richer households tend to be larger"; this does not match my personal experience or the folks I know.

Symmetry4• 14 years ago

That's true regarding children, but the difference isn't very large. On the other hand, people who are older tend to make more money and have more children, and people who are more educated tend to make more money and are more likely to marry.

vannevar15• 14 years ago

[I]ncome inequality has been rising at more or less the same rate everywhere in the industrialized world...

The link you cite excludes income from capital gains, which for the wealthiest Americans comprises most of their income and which is taxed at a much lower rate, as Mitt Romney's recent tax disclosure exemplifies.

Symmetry4• 14 years ago

True, I don't have any good cross-national comparison that includes capital gains, if anybody has that I'd be grateful if they could post it. My guess would be that the effect would be pretty much the same from nation to nation, but of course I can't be sure of that without data.

ppereira• 14 years ago

1. These plots are derived from Thomas Pickety and Emmanuel Saez's famous work, http://elsa.berkeley.edu/~saez/pikettyqje.pdf. Their research has spurred similar analyses around the world, much of which is in the World Top Income Database, http://184.168.89.58/sketch/. It is based on income tax filings, which correspond to the tax unit for each country. In the US, that would be by household.

You prefer talking about consumption inequality, I prefer talking about wealth inequality, but the best data that we have is for income inequality hence the choice in this plot. The defect with measuring income inequality is that it does not directly correspond to each individual's ability to bear the tax burden, which leads to issues of tax fairness. The issue with consumption inequality is that the fraction of income consumed tends to decline with increasing income, so this metric is even less tied to an individual's ability to bear the tax burden.

2. I think you are greatly overstating the importance of the 1986 Tax Reform Act. During the period covered by this plot, the income tax essentially went from - a low revenue elite tax - to wartime tax grabs of greater than 70% of income, - to a permanent tax on the middle class with top marginal rates above 85%, - to a tax allowing a plethora of deductions, - to one with our current Reaganesque rates. There have been huge changes over the years, which are mostly captured in these plots.

3. Income inequality has been rising in many countries, although this is closely related to reductions in top marginal tax rates in each country. It is also related to tax avoidance and treaty shopping by multinationals in a global economy.

In addition to income tax rates, other things that affect income inequality include longevity, birth rates, and the effectiveness of estate taxes since wealth is usually divided amongst children. Also important are capital gains taxes and tax sheltering.

Right now, many modern countries are in a bizarre position where the incidence of income taxes, i.e. tax on net change in wealth per year) is higher on the middle class than on the very wealthy who have greater opportunities to take deductions, reclassify, and move income.

ef42• 14 years ago

"It is easy to find a man in almost any line of employment who is twice as efficient as another employee, but it is very rare to find one who is ten times as efficient."

That's not really true for many of the newer industries that have arisen since then. Programming being the classic example.

Factories made workers orders of magnitude more productive. To get the benefit you needed access to a factory, which is why workers in the wealthy West ended up so much richer than the rest. Our education system still works on the assumption that getting you into a factory is a good idea.

But today factories are accessible to far more of the world, so their unique advantage has faded. They're still critical for our absolute level of wealth, but the relative wealth of a factory worker is falling and isn't going to stop.

Now it's skill with computing can make a worker orders of magnitude more productive. The effect is obvious if you spend any time replacing manual processes with software. A team of three programmers can easily work for a year and produce a system that replaces the work of thousands of people forever.

Which is why we need a completely different education system that helps people achieve this new level of productivity.

Do we really need that many people who understand computing? Won't it just cause a glut of programmers? Industrialists worried about the same thing 110 years ago. They turned out to be wrong. People don't just suddenly say "Well, I'm 100x richer than my grandparents. I guess I have enough stuff now." Instead the extra wealth lets entirely new industries be born, and creates entirely new "needs" and wants.

A world where basic education included reading, writing, and recursion would be a very productive, very wealthy world. I expect it will happen, because the economic incentives are huge. But it will take a long time to shift cultural inertia.

ck2• 14 years ago

our enduring belief in social mobility

aka "I'm just temporarily poor, I could be a millionaire in a few years"

It can happen, like the amazing story of Spanx, but no-one ever sees the exception as an actual exception to the rule.

History of income inequality in the US

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