October 28, 2011

Rising income inequality

The Congressional Budget Office released a report yesterday looking at the changes in the distribution of household income from 1979 to 2007. The graph on the very first page tells the whole story: The top 20% has increased its share of the national income at the expense of the other 80%, whose shares have all gone down.

Jared Bernstein of the Center for Budget and Policy Priorities digs deeper into the report:

Between 1979 and 2007, incomes grew by 275 percent for the wealthiest 1 percent of households, 37 percent for the middle 60 percent of households, and 18 percent for the poorest 20 percent of households. These figures adjust for inflation and account for the impact of taxes and government transfer payments such as Social Security and unemployment benefits.


In media coverage of this report, I have heard phrases like incomes of the top 1% have 'doubled' or 'almost tripled'. This is wrong. A 275% increase means that they increased by a factor of 3.75, i.e., almost quadrupled!

Kevin Drum comments that what has happened is that "For all practical purposes, every year about $700 billion in income is being sucked directly out of the hands of the poor and the middle class and shoveled into the hands of the rich."



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I'm fully aware of and against trickery and illegal shenanigans being used to enrich the top earners at the expense of everyone else. But I don't see why the productivity of a factory worker would have to increase at the same rate as anyone else. It isn't quite accurate to say income is being sucked from one group into another group, as if the normal course of events would be for everyone to get richer at the same rate regardless of what they do. Why would we expect that?

From my experience in manufacturing, the people assembling products contribute the same value to the company this year as they did last year. They aren't doing anything special that would warrant a massive pay increase. Other people, however, like the sales department or engineering department, do have the potential, based on their choices, to substantially increase the profits of the company. So, in general, I don't think we can expect consistency in that area.

Posted by Robert Allen on October 29, 2011 03:49 PM

Well, the fact is that most rich people try to bring their business to the next level, which then came out a lot of ideas to sucks money from not only the poor but other potential buyers as well.

Posted by Andy Chin on November 1, 2011 06:45 AM

Those same engineers and salesmen had that same capability to make money for the company in 1979. That argument explains personal economic mobility (to the extent that it exists, which is less than it "feels like") and the large (already in 1979, and still in most other economies) discrepancy of salaries between professionals and non-professionals. To my view it does not explain this recent enormous expansion of that discrepancy.

Someone invents an awesome new processor. Good for him. He should be and is handsomely rewarded. Apart from inflation, why should he be paid so dramatically much more (relative to GDP, and accounting for taxes and transfer payments) than was his 1979 counterpart who invented an awesome new processor in 1979?

Posted by Doug McClean on November 10, 2011 11:20 AM