Who has gained from the inequality boom?

by John Quiggin on July 25, 2010

A question that comes up at CT quite a bit is: who has benefited from the massive increase in US income inequality over recent decades. I finally got around to chasing down Congressional Budget Office data (derived from tax records for the period 1979 to 2005), and the answer, in short is:

  • The top 1 per cent roughly doubled their share of both pre-tax income (9 per cent to 18 percent) and after-tax income (7.5 per cent to 15 per cent)
  • The rest of the top 10 per cent slightly increased their share (from about 20 to about 22 per cent)
  • The next 10 per cent held their share (about 15 percent)
  • The remaining 80 per cent of households saw their share drop (from 58 per cent to 48 per cent of post-tax income, with the biggest drops coming at the bottom. The bottom 40 per cent of households now get a smaller share of post tax income (14 per cent, down from 19) than the top 1 per cent.

    A couple of observations on this.

First, to answer the question “who gained from the inequality boom” we need a counterfactual. If, as is commonly claimed, pro-rich policies raised the average rate of growth of income, people in the top 20 per cent of the income distribution were better off, since they had a constant share of a bigger cake. The effects are ambiguous for everyone else, and, on any plausible numbers, everyone below the median is worse off than they would have been with moderately slower, but equitably distributed growth. On the other hand, if pro-rich policies contributed to the slowdown in economic growth for the period since the 1970s, compared to the postwar boom, then the only net beneficiaries are those in the top 1 per cent of the income distribution.

Second, the picture would probably change a bit if benefits (particularly employment-related health benefits) were taken into account. My guess is that this would probably improve the outcome for the top quintile (since this group mostly held on to benefits which increased faster than wages) and worsen it for those below the median (who have lost access to benefits over time).

Finally, it’s striking that, on the CBO figures, the tax system is almost exactly proportional: that is, it has no net redistributive effect at all. The top 1 per cent have a somewhat smaller share of post-tax income than of (measured) pre-tax income, but that almost certainly reflects their capacity to hide income from the tax system.

{ 39 comments }

1

Ombrageux 07.25.10 at 9:29 am

A sad state of affairs. So are we (and Americans in particular) really going to end split between Morlocks and Elohim?

2

Luis Enrique 07.25.10 at 10:00 am

3

Tim Worstall 07.25.10 at 10:14 am

But which “pro-rich policies”?

I know I bang on about this but I’ve as yet not had an adequate refutation of the point.

It’s globalisation.

No, not (just, or only, perhaps not even majorly) that the lower paid are competing with the almost not paid at all in places like China but that those very few at the top (the 0.1%, not just the 1% that JQ’s figures show) are now able to pick up nickels from billions of people instead of the former dimes from the tens or hundreds of millions in purely domestic economies.

If this idea is in fact wrong I’d love someone to show me how/where it is: partly to increase my own knowledge and partly so that I can go and find something else to be wrong about.

4

Zamfir 07.25.10 at 10:41 am

Tim, then why aren’t they picking up pennies from billions, but instead are still getting nickels?

If globalization made new economies of scale possible, why should those economies acrue to a small set? Why isn’t competition within that set driving their wages back to the old level?

5

Seeds 07.25.10 at 10:57 am

Tim, is it fair to call a tax cut for rich people a “pro-rich policy”?

Even if you take the view that being “pro-rich” is being “pro-everyone” because, uh, trickledown or something, and even if you take the view that rich people would be getting richer anyway thanks to globalisation, a tax cut designed to make these richer rich people richer at an even faster rate is surely a “pro-rich policy”?

6

hix 07.25.10 at 2:23 pm

How reliable are tax records? If the profit doesnt appear in the tax record because its somewhere on the Caymans or Ireland for tax purpose, tax statistics wont see it.

7

Tim Worstall 07.25.10 at 2:40 pm

“If globalization made new economies of scale possible, why should those economies acrue to a small set? Why isn’t competition within that set driving their wages back to the old level?”

Tournament economics? That top 0.1% (I think some have even tracked it, in the US at least, to the top 0.01% or a few hundred people) include the likes of Spielberg ($200 million a year or so), Tiger Woods ($100 million a year) etc. These are people who obviously are enjoying new economies of scale and yet they’re also people (Woods especially, obviously) engaged in a tournament. It doesn’t matter how much better he is than the others, even being 0.000001% better will mean he gets a disproportionate share of that expanded market.

@5…I’m not arguing for (or against) any particular tax regime or any other policy stance here. Only that what is causing whatever increase in inequality there might be is probably quite important to the policy response to that increase in inequality (should we want to make one).

For example, if the increase in US inequality is a result of globalisation, which, arguably, has also led to a large reduction in absolute poverty, then we might want to weigh off the benefits of reducing globalisation, less domestic inequality, against less absolute poverty reduction.

Or if rising US domestic inequality is a result of rent seeking we might just say screw the bastards and try to eradicate those rent seeking opportunities.

Neither explanation precludes higher tax rates of course. But I do think we want to know why inequality is increasing before we decide what, if anything, is to be done about it.

8

lemuel pitkin 07.25.10 at 3:00 pm

This post is good. But there’s another important point missing, which is that absolute income (including health benefits, etc.) does not exhaust the space of economic effects on wellbeing. We need to take seriously the idea that relative income matters also — indeed, if you find the evidence assembled by folks like Richard Wilkinson convincing (as I do), then for rich societies it matters much more.

A rising income share at the top deprives the rest of us of status, dignity and social power, and shifts the political and cultural centers of gravity toward elitism and exclusivity. This is true whether incomes lower down are rising, stagnant, or falling.

9

zamfir 07.25.10 at 4:32 pm

Tim, I fail to see the connection between poverty reduction and Tiger Woods’ millions. As far as I can tell, a world where he is paid less would be exactly the same as ours, except there would be some money not in Tiger’s hands, but in hard to guess other hands.

It is not as if he would stop playing if he was paid mere hundreds thousands,or even that a sports world without Tiger Woods would be less entertaining to the tune of 100 million dollar. Everyone would just watch something else.

I guess most very rich people are business owners and their children, not entertainers. But if their wealth is based on something vaguely resembling a golf tournament, I fail to see how that is coupled to poverty-reducing global trends.

10

etbnc 07.25.10 at 4:46 pm

Luis Enrique, thanks for the link to Prof. Kenworthy’s graph (currently comment #2). I’ve seen several inequality graphs, so at first glance I overlooked the sad feature of Kenworthy’s: the two data lines hugging the bottom axis. Ouch.

Looks like there might be a lot of useful material at his web site.

Thanks for contributing that source.

11

Seeds 07.25.10 at 6:48 pm

Tim:

Sorry for the mix-up! I wasn’t suggesting that you were arguing for or against particular tax regimes. In your original post, you posed the question ‘which “pro-rich policies”?’ and I naturally assumed that either you had forgotten about / were ignorant of American tax cuts on high-earners.

12

hhoran 07.25.10 at 8:03 pm

Isn’t the issue here that no one can demonstrate the marginal product/marginal value added by the top 1% folks in the last 15 years that would justify a doubling of their incomes? It would seem to be a more productive approach to start with evidence of marginal value creation, and see how much of the income growth you can explain, rather than to start with theories of nefarious behavior, and see how much of the income growth is tainted. That’s what you would do with any other income groups.
Globalization is obviously critical to holding down the income growth of everyone else, but doesn’t seem to explain the explosive income growth here. To some extent, a company that gets the one-time cost cut by offshoring lots of jobs, might get a big equity bump, and that short-term equity growth might be largely captured by the 1% folks. But the factor driving the huge wealth transfer isn’t “globalization”, it is the perversity of executive comp and short-term stock market fluctuations, which no longer have much (if anything) to do with long term value creation.
Obviously there is a strong correlation between 1% income growth and the massive growth of the financial sector. To some extent the term “globalization” covers the growth of cross-border financial flows, separate from cross-border shifts of underlying economic activity, but the financial bubble and “globalization” are really different things. This of course begs the question of how much of the growth of finance (as a % of GDP) in this time period was legitimate value creation, after you net out the huge negative externalities.
If anyone can reference serious studies that have looked at explaining relative income trends in trems of relative value creation, I’d be most appreciative.

13

JanieM 07.25.10 at 8:39 pm

Tim Worstall: That top 0.1% (I think some have even tracked it, in the US at least, to the top 0.01% or a few hundred people)

The top 0.01% of US households in these CBO charts included 9,000 households in 1979 and 11,000 households in 2005 (see here, at Table 3).

In 1979, the average after-tax income of the lowest quintile was $14,400; of the top 0.01% it was $4,188,300. The top 0.01% were taking home (after taxes) 291 times the bottom quintile.

In 2005, the average after-tax income of the lowest quintile was $15,300; of the top 0.01% it was $24,286,300, or 1587 times the bottom quintile.

14

Tim Worstall 07.25.10 at 8:44 pm

“Tim, I fail to see the connection between poverty reduction and Tiger Woods’ millions. “

If globalisation is both the cause of absolute poverty reduction and of Woods’ tens of million then there is a connection. Certainly something has been happening to reduce absolute poverty around the world (the $1, $2 a day stuff) and something has been happening to lead to the increasing disparity between top 1% (or 0.1%, 0.01%) and 90 to 99% incomes in the US.

My contention (claim, assertion, is too strong) is that globalisation is causing both.

What I’m interested in finding out is whether you much brighter people than me can disprove that contention. As I say above, so that I would be better informed.

15

Sandwichman 07.25.10 at 9:14 pm

Tim, globalisation is not just a matter of everything “going global.” There are rules to the process and those rules are made by governments to advantage certain groups of people and to disadvantage other groups of people. The people those rules mostly benefit are the rich. The people the rules mostly hurt are the less rich (perhaps the median wage earner more than the poor). Dean Baker talks quite a bit about this lopsided implementation of so-called “free trade”. It is not some value-neutral globalization that favors the rich but a very particular implementation of globalization — an implementation that favors the rich, that maintains and extends protectionism for the privileged even as it intensifies competition with low-wage labor.

16

Robert 07.25.10 at 10:31 pm

Don’t take Worstall’s foolish or knavish derailments seriously.

Tony Judt references Richard Wilkinson and Kate Pickett’s The Spirit Level: Why More Equal Societies Almost Always Do Better (2009). Does anybody have an opinion on this book?

17

nick 07.25.10 at 10:36 pm

eg, Tiger Woods’s zillions: a particular intellectual property regime is necessary to convert his global symbolic capital into, you know, actual dosh….

18

ScentOfViolets 07.25.10 at 10:39 pm

Tim, globalisation is not just a matter of everything “going global.” There are rules to the process and those rules are made by governments to advantage certain groups of people and to disadvantage other groups of people. The people those rules mostly benefit are the rich. The people the rules mostly hurt are the less rich (perhaps the median wage earner more than the poor).

Exactly. The so-called “liberals” of the day pointed out that competing against people who were paid $3/day and lived on that wage, or against people who could just dump all of their toxic waste by the side of the road or in the water or air with no penalties whatsoever wasn’t exactly what was meant by “comparative advantage” and “competition”, and that the only way to level the playing field was with some sort of tariffs slapped on imported goods that equaled the cost of these advantages. And – of course – they were pooh-poohed, of course they were dead right, of course the Very Serious People are now scratching their heads and saying that nobody predicted this, and how could they have know what the outcome would be.

Guess who these sorts of arrangements benefited, and guess who we were all told would benefit, but in fact did not?

19

ScentOfViolets 07.25.10 at 10:50 pm

Tony Judt references Richard Wilkinson and Kate Pickett’s The Spirit Level: Why More Equal Societies Almost Always Do Better (2009). Does anybody have an opinion on this book?

Well, for a long time, the debate was whether or not the policies that led to these vast inequalities were better than policies which consciously strove to avoid them. The argument went that as long as the rates of growth were higher in the former, in the long run everyone would be better off than in the second case where the growth rates were presumably lower. And much ink was spilled on these intangible benefits of the second scenario as opposed to the very tangible ones of the first.

Now? Well, there seems to be an emerging consensus that great inequalities actually stunt growth in the long run as opposed to situations where they are deliberately damped down. So the old argument is rendered invalid because even if (some) people don’t make as much money as they would otherwise in the first scenario, they will still by virtue of superior growth actually be better off in the long run under the second scenario, and so we get more of both the intangible and intangible benefits than we would in the first.

Of course, those old arguments are now no longer operative, and rather than concede they were wrong, advocates for more inequality now use a completely different set of justifications, usually something to the effect that the wages of the top earners would be greater than they would otherwise, even if average wages are lower.

20

John Quiggin 07.25.10 at 10:50 pm

Tim, this will be at least the third time I’ve responded to your presentation this argument by pointing to my book manuscript, available at zombiecon.wikidot.com, in the section of CH 3 headed “China and India”. Tell me if you can’t find it.

21

Brautigan 07.26.10 at 2:53 am

Right off-hand, Tim, I’d say it’s rent-seeking enabled by globalization. Globalization has enabled Captains of industry (US-based) to outsource labor (increase productivity), and drive down US wages. This, of course, has been enormously exacerbated by anti-union policies and more-and-more regressive taxation over the last twenty years (mostly rationalized by the fear of overseas competition!).

22

Charles St. Pierre 07.26.10 at 3:02 am

Tim: If globalization is causing the increase in income disparity in the US, do we need it?
We are, after all, the most globalized, least protected society in the developed world. If globalization is literally tearing our society apart, should we seek an alternative?

But how do you explain the fact that the increase in income disparity is not nearly so great in the rest of the develoed world?

23

Tim Worstall 07.26.10 at 9:00 am

John, yes, I found it, and it doesn’t say anything at all about income inequality in the US. It does say that the (relative, lately) success of India and China doesn’t have any implications for economic liberalism in rich societies. But that wasn’t my question at all.

@14, I’m aware of Dean’s arguments and quite taken by them. Yes, I do think that if there is to be globalisation for the factory worker then there should be for the professional (everyone can still disagree about whether there should be globalisation at all of course). One of Dean’s examples is how journalists would like it if newspapers stopped using expensive people with journalism graduate degrees and used cheaper foreigners. To which, as someone sitting in Portugal who has occasionally written for US outlets I say bring it on.

@21. “If globalization is causing the increase in income disparity in the US, do we need it?”

That’s the corollary to the very question I’m asking. What is the cause of increasing in country inequality (and it is happening everywhere, even if not quite as much, leading to hte thought that a global phenomenon might have a global cause)?

If it is globalisation (as opposed to Republithugs lowering top marginal tax rates, or whatever other answer one might come up with) then, of course, it is globalisation that needs to be looked at in terms of the costs and benefits of it.

I’m absolutely not, here, trying to force my own policy preferences (globalisation, Yay!) on anyone. I really am trying to ask, well, what is it that is causing increased income inequality? For, as seems entirely obvious to me, unless the cause is found then solutions cannot be.

24

derek 07.26.10 at 11:52 am

Income inequality is all very well, but I’d like to know more about the distribution of wealth. I’m guessing that’s become even more unequal even more rapidly. And that, after all, is what income is for, once you get past subsistence and a bit of consumption: it’s for accumulating wealth.

25

Dan 07.26.10 at 12:18 pm

@17: Guess who these sorts of arrangements benefited

I imagine, among others, the people on $3 a day benefited. This is one reason I find it very hard to take seriously all of the hand-wringing about “rising inequality”. If you really cared about the position of the worst-off, not just the position of the worst-off-in-rich-countries, you might think twice about advocating, say, tariffs designed to nullify the “advantage” of being paid $3 a day.

26

Seeds 07.26.10 at 12:39 pm

Tim, isn’t it a bit “rich” (see what I did there?) for you to derail this thread into an argument about globalisation, then, when John points you towards a rebuttal of your argument about globalisation, complain that it doesn’t address income equality in the US?

The section in John’s book is attacking the idea that globalisation has been a net good, worldwide, even if it’s contributed to rising inequality in the US. This is something that your posts have implied / explicitly suggested. And to reiterate, this argument has nothing to do with the substance of the original post, but you are responsible for the derail.

27

DHFabian 07.26.10 at 1:22 pm

A largely-ignored factor is the impact of our welfare “reform” on wages and job security. “Workfare” has essentially been the creation of a Third World (minimum wage or less/no workers’ rights) workforce here in the US, reportedly often used as replacement labor for those put on “indefinite lay-off.” Previously family-supporting jobs have been broken down into pt. time, bottom wage workfare assignments. With each round, more workers are added to the workfare pool.

The tangle of workfare policies has been a tool for suppressing wages, getting rid of workers’ rights and protections, and ensuring an absence of union representation. Welfare reform is proving to be an increasingly strong factor in the declining quality of life in the US and the profitability of corporations.

This isn’t the only factor in the redistribution of wealth from communities into the bank accounts of corporations, of course, but it is an important one.

28

hix 07.26.10 at 1:40 pm

Do those right wing prophagandists even understand how they are shooting themself in the foot with their globalication lies. The only effect if you make up a story about how globalication leads to more inner country inequalty is that free trade gets abolished.

29

lemuel pitkin 07.26.10 at 3:13 pm

Tony Judt references Richard Wilkinson and Kate Pickett’s The Spirit Level: Why More Equal Societies Almost Always Do Better (2009). Does anybody have an opinion on this book?

I think Wilkinson’s work is very important for this discussion. I’ve only skimmed a few parts of The Spirit Level but it’s not clear that it adds a lot substantively to his earlier books, Unhealthy Societies and The Costs of Inequality, which are both very good. The important point is that asking how incomes further down the distribution have changed tells us little or nothing about the social consequences of increased inequality.

To be honest, I’m surprised how many smart, progressive economists treat absolute income as a proxy for wellbeing, when it’s clearly nothing of the sort. (DeLong is the worst offender, but he’s hardly alone.) Look at the Stern Review of the costs of climate change and of policies to avert it. Their absolute worst case scenario for climate change is that it will reduce world GDP by 14 percent, i.e. about 5 years of normal growth in the industrialized countries. How terrible would it be if we were forced todayto return to the penury and deprivation of our lives in 2005 or even 2000?

Um, not very terrible. From which — if you take Stern’s numbers at all seriously — you can only conclude that either climate change is no big deal, or that its effects on measured incomes are only a trivial part of its impact.

I’ll take door number 2; I’m sure most of us here would; I’m sure John Q. would. But in that case you have to accept the implications for questions like the costs of inequality — absolute income may be only a trivial part of those, too. And that’s where Wilkinson’s stuff is so valuable — in thinking about where the real costs of inequality lie.

30

chris 07.26.10 at 4:17 pm

It doesn’t matter how much better [Tiger Woods] is than the others, even being 0.000001% better will mean he gets a disproportionate share of that expanded market.

That’s not really true; if he were really only slightly better than other professional golfers, he would win some and lose some and overall not stand out that much from the crowd. It’s precisely because he is (or was in his prime; I don’t follow golf that closely but I understand some people think he is off his game at the moment, for obvious reasons) *so much* better than other top golfers that he became a phenomenon and not just some guy who won sometimes.

This is because not all golf tournaments are won by the best player, just like the World Cup is not always won by the best team, etc. Time and chance happeneth to them all. There is a school of thought that is extremely resistant to any attempt to apply this principle to *economic* outcomes, including economic “tournaments” like the market share of Microsoft, but they don’t really have any facts to back up their ideology on that issue AFAICT.

Real-world outcomes are noisy.

31

Salient 07.26.10 at 4:19 pm

Actually it’d be great to know where to find some follow-up to #24. Is someone somewhere publishing an ongoing / longitudinal study of the purchasing power of laborers around the world? Probably no equivalent of CBO data exists…

32

lemuel pitkin 07.26.10 at 4:35 pm

Actually it’d be great to know where to find some follow-up to #24. Is someone somewhere publishing an ongoing / longitudinal study of the purchasing power of laborers around the world?

Yup. Jamie Galbraiith’s Inequality Project at the University of Texas.

33

Straightwood 07.26.10 at 6:45 pm

An important reason for growing inequality is the relentless focus on aggregate measures of economic growth, such as GDP. There appears to be no consensus on devising reliable and widely accepted measures of equitable societal wealth distribution. The creation of such measures and their use in economic policy making are crucial to avoiding a neo-feudal future for America.

34

Salient 07.26.10 at 7:15 pm

Hey, thanks lp.

35

John Quiggin 07.26.10 at 8:50 pm

Seeds @26 – thanks for your response to Tim W. I agree entirely

LP, I agree that inequality is a big issue, and I think there are a lot of complexities that have yet to be explored. In particular, I’m not convinced that relative income (that is, the subjective effects of comparing ones one income to a reference point) is the right way to think about it. Rather, I think, inequalities in income and status are intertwined with power relationships, social inclusion and exclusion and so on. The more that money income is the measure of all things, and the more unequally it is distributed, the worse these problems become.

36

Billikin 07.26.10 at 11:30 pm

John Quiggin: “In particular, I’m not convinced that relative income (that is, the subjective effects of comparing ones one income to a reference point) is the right way to think about it.”

What about indebtedness of the lower half of the socio-economic scale? Isn’t debt peonage of more concern than relative income? (OC, the two are related.)

37

Frank Pasquale 07.28.10 at 1:26 pm

But the real story is inequality within the top 1%. Over roughly that time period, those at the 99.99th percentile did spectacularly better than those at the 99.9th, 99.5th, 99th, and 95th percentiles. There is some evidence that even within that top 99.99th percentile, inequality reigned. In 2005, the “Fortunate 400”—the 400 households with the highest earnings in the U.S.—made on average $213.9 million apiece, and the cutoff for entry into this group was a $100 million income—about four times the average income of $26 million prevailing in the top 15,000 returns.

I have more stats in part II of this article: http://bit.ly/cYdvfl

38

mlb 07.29.10 at 2:10 pm

I think you are all missing a very large factor – the fundamental way we manage our economy (via the Fed). We have a system in place whereby:

1) We target CPI first and foremost – wages are a large component of CPI. Therefore any rise in labor’s bargaining power is quickly met with monetary tightening.
2) As long as CPI (i.e., wages) are low, we accept any amount of credit creation and asset inflation. This leads to higher asset values relative to wages, which benefits the wealthy.
3) The credit creation leads to boom-bust asset cycles. However, many asset-owners and wealthy interests are bailed out in the bust phase of the cycle.

39

roy belmont 07.29.10 at 11:05 pm

Might be interesting to see an ethnic breakdown on those unequal rise/fall stats. Not that ethnicity is anything real or anything. Though then again the US does have something like a 60% incarceration rate for young black males. Etc. That would probably be the bottom end of the chart. The top end might look a little different than the general US demographic as well.

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