Interesting article on income distribution

[wiegie]

New Income Inequality Data: Surprising and Frightening

by Bruce Judson on September 29th, 2009

The newest economic inequality numbers, which ran counter to the expectations of almost all experts, are frightening. Yesterday, the Associated Press released an article titled, US income gap widens as poor take hit in recession. The opening paragraph of the article, based on recent census data, reads:

 

The recession has hit middle-income and poor families hardest, widening the economic gap between the richest and poorest Americans as rippling job layoffs ravaged household budgets.

 

The article, which then discussed the Census statistics that led to this conclusion, failed to mention that the Census Bureau considered the differences between 2007 and 2008, with regard to economic inequality, statistically insignificant.

 

But, whether the Census Data shows a meaningful increase, or not. is irrelevant. The Census Data reports that, contrary to the almost universal expectations of economists, economic inequality most likely did not decrease in 2008. Experts had anticipated that the declines in income of the rich would lead to a reversal in this groups ever–widening share of our national income. Instead, the Census reported that the 2008 income losses by the top 10% of Americans were offset by larger losses among middle class and poorer Americans.

 

MIT economist Simon Johnston appears to have been one notable exception to this expectation of a shrinking income gap.

 

Let’s review what we know about the measurement of income inequality before discussing the disturbing implications of this newest government report.

 

About two weeks ago, I critiqued a Sept 10, 2009 front page story in the Wall Street Journal titled, Income Gap Shrinks in Slump at the Expense of the Wealthy. My critique had three central points:

 

First, economists have, with few exceptions, agreed that Census Data is inappropriate for measuring income inequality because it consistently understates the income of the wealthiest families. To protect the privacy of reporting individuals, the Census “top-codes” income, which means that no one is ever recorded as making more than about $1.1 million in a single year. So, oil traders, hedge fund executives and anyone else at the super-high end of the income strata who might earn $100, $50 or $5 million in a single year, always earn $1.1 million or less in this Census Data. In addition, the Census Data does not include capital gains income, which is typically a large source of income for the wealthiest Americans.

 

Two economists, Professors Emanuel Saez and Thoma Pickety, developed a method for measuring income inequality using IRS data, which avoided the problems inherent in using Census Data. This data was recently updated in response to the IRS release of 2007 information, and found that: Economic inequality in 2006 was, by some measures at the highest levels, ever found in the data available for the past 95 years. In 2007, these same measure showed a further jump further bringing America to it it’s highest levels of economic inequality in recorded history.

 

As a consequence of Census top-coding and the lack of capital gains data, the Saez-Picketty methodology has consistently shown that the Census substantially understates the extent of economic inequality in the nation. This means that, there is a real possibility that the the new Census Data understated the extent to which income inequality grew in 2008, and that the relative losses of the wealthiest families, versus less fortunate Americans, will be more than statistically insignificant.

 

It is possible that losses in reported capital income by the wealthiest Americans, if captured by the Saez-Picketty methodology, will be larger than the the incomes above $1.1 million that were not reported and offset the Census findings, leading as economists anticipated to a decline in the share of income going to the rich. However, I view this as unlikely. In considering this possibility, its important to remember that the IRS works on reported income gains, not gains which were never captured as taxable income. For income reporting purposes, the question is not whether the market value of capital assets declined but whether they were sold at an actual loss from their purchase price.

 

We will not know the answer to this question until July or August 2010, but in weighing the available evidence my working hypothesis is that as demonstrated by this new Census Report, income inequality did not decrease from 2008 to 2007.

 

Second, the original Journal article expressed a strong expectation that, as a result of the Great Recession, the ongoing growth of income inequality would decline substantially through 201o. My critique indicated that this was “far from clear.” The conventional economic wisdom, based on historical data, is that income inequality decreases, at least temporarily, as the richest Americans lose income faster than less-well-off Americans during a downturn. In contrast, this new data suggests that the dangerous cycle toward increasing income at the top of America has become even more self-reinforcing than previously recognized. We are now at the point where the pure market forces, which many economists told us would eliminate this issue, are no longer effective.

 

 

Third, the Journal article implied that the decrease in economic inequality it incorrectly predicted might be the start of a long-term trend. Instead, I demonstrated that, even if income inequality did decline in 2008 and 2009, it would almost certainly be “temporary.” The historical evidence shows that economic inequality frequently declines in a downturn, in the absence of strong government action, but that it will almost inevitably rebound and continue its march forward.

 

Now, let’s return to our main point:

 

Early next week, my new book It Could Happen Here will be released by HarperCollins. The book is an in-depth look , based on a historical analysis, of the implications of our historically high levels of economic inequality for the nation’s ultimate, long-term political stability. As economic inequality grows, nations invariably become increasingly politically unstable: Should we complacently believe that America will be different?

 

A central conclusion of the book is that once economic inequality reaches a self-reinforcing cycle it is halted only by inevitably controversial, hard-fought, bitterly opposed government action. Senator Jim Webb encapsulated this idea, when he wrote in his book, A Time to Fight: Reclaiming A Fair and Just America:

 

“No aristocracy in history has decided to give up any portion of its power willingly.”

 

In 1928, economic inequality was near today’s levels. Franklin Roosevelt succeeded in reversing the trend toward the continuing concentration of wealth, but it was a turbulent battle. In 1936, while campaigning for his second term and speaking at Madison Square Garden, FDR told the crowd:

 

“Never before in all our history have these forces [Organized Money] been so united against one candidate as they stand today. They are unanimous in their hate for me and I welcome their hatred.

 

I should like to have it said of my first Administration that in it the forces of selfishness and of lust for power met their match. I should like to have it said, wait a minute, I should like to have it said of my second Administration that in it these forces met their master.”

 

In FDR’s era and in our own, money brings power: both explicitly and implicitly, in hundreds of different ways, both large and small. Today, the wealthiest Americans, together with a number of financial and corporate interests that act on their behalf, protect their ever-increasing influence through activities that include, among others, lobbying, supplying expertise to the councils of government, casual conversation at dinner parties, the potential for jobs after government service, the power to run media advertisements that influence public opinion. Indeed, MIT economist Simon Johnston, writing in The Atlantic asserted that the U.S. is now run by an oligarchy:

 

The great wealth that the financial sector created and concentrated [ from 1983 to 2007] gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man) … Of course, the U.S. is unique. And just as we have the world’s most advanced economy, military, and technology, we also have its most advanced oligarchy.

 

The new inequality data suggests that the potential problems for the nation associated with the concentration of wealth and power are even more severe than previously recognized. Two weeks ago, I wrote that “Once income concentration becomes a reinforcing cycle of the kind we are witnessing, it is never stopped by pure market forces.” This mechanism is now in full swing. The market forces associated with the Great Recession, which many economist had expected to stem the growing, corrosive gap between the rich and the poor, appear to have become ineffective.

 

The great strength of American democracy has always been its capacity for self-correction. However, Robert Dahl, the eminent political scientist, recognized that political power fueled by wealth may ultimately neutralize this central aspect of our democracy. In his 2006 book, On Political Equality, Dahl wrote:

 

As numerous studies have shown, inequalities in income and wealth are likely to produce other inequalities..

 

The unequal accumulation of political resources points to an ominous possibility: political inequalities may be ratcheted up, so to speak, to a level from which they cannot be ratcheted down. The cumulative advantages in power, influence, and authority of the more privileged strata may become so great that even if less privileged Americans compose a majority of citizens they are simply unable, and perhaps even unwilling, to make the effort it would require to overcome the forces of inequality arrayed against them.

 

In the chapter following this quote, Dahl notes “that we should not assume this future is inevitable.” He’s right. But, was clearly concerned. Three years late, we should be even more concerned.

 

Many current Executive Branch initiatives deserve our support and praise: However, nothing proposed to date will effectively halt growing economic inequality, and its corrosive impact on our economy and the long-term future of the nation. (In a future post, I will explicitly discuss the proposed regulatory reform of the financial sector.)

 

My analysis in It Could Happen Here concludes that without a vibrant middle class, the the American democracy as we know it, is not sustainable. Before the Great Recession, the middle class was in far worse shape than was generally acknowledged. In an economy with a record number of job seekers for every available job, the potential for nearly one-half of all home mortgages to be underwater, and increasing foreclosures, the collapse of the middle class will accelerate. With each job loss and each foreclosure, another family becomes a member of the former middle class.

 

America has never been a society sharply divided between have’s and have not’s. Unfortunately, this new data says to me we continue to head in that direction. Economists assumed that the Great Recession would be a circuit breaker that would halt this advance, at least temporarily. It did not.

 

With no new legislation, it appears are potentially on course for 13 million foreclosures, almost one in every four mortgages in the nation, from the end of 2008 through 2014. Do we really believe that we can turn such huge numbers of Americans out of their homes with no consequences for the health of our system of governance? Could our democracy survive a transformation into a nation composed principally of a privileged upper class and an underclass which struggles from paycheck to paycheck and lacks basic economic security?

 

We will only reign in growing economic inequality if the President and the Congress are ready to fight in the style of Franklin Roosevelt. FDR was a divider not a conciliator. Before World War II, he fought an all-out war at home. Today, “There’s class warfare, all right,” as Warren Buffett said, “but it’s my class, the rich class, that’s making war, and we’re winning.”

 

I fervently hoped that we have not passed the point of no return, described by Professor Dahl. The recent news shows we are one step further on this road. If we continue down it, our nation may be on the path to becoming a House divided against itself, which ultimately cannot stand.

http://itcouldhappenhere.com/blog/frightening/

[Ursa Majoris]

Saw the original report yesterday. Is anyone seriously surprised by this? This isn't a representative democracy or a republic any more, it's a bunch of political puppets dancing to the tune of a plutocratic oligarchy.

[wiegie]

if anybody wants to read a research paper on the topic, I highly suggest this one:

 

http://www.princeton.edu/~joses/wp/InequalityJME.pdf

[westvirginia]

Saw the original report yesterday. Is anyone seriously surprised by this? This isn't a representative democracy or a republic any more, it's a bunch of political puppets dancing to the tune of a plutocratic oligarchy.

 

Winner winner, chicken dinner. IMO, the problem is the more power the politicians have to dole out, the more susceptible they are to being bought. Now the lefties will say the pols just don't have ENOUGH power. Well, if power corrupts, and absolute power corrupts absolutely, I'm not sure that's the answer we need...

[Perchoutofwater]

Saw the original report yesterday. Is anyone seriously surprised by this? This isn't a representative democracy or a republic any more, it's a bunch of political puppets dancing to the tune of a plutocratic oligarchy.

 

 

Winner winner, chicken dinner. IMO, the problem is the more power the politicians have to dole out, the more susceptible they are to being bought. Now the lefties will say the pols just don't have ENOUGH power. Well, if power corrupts, and absolute power corrupts absolutely, I'm not sure that's the answer we need...

 

I agree Lincoln screwed us all! Jefferson, Madison, Calhoun, even Robert E. Lee all argued that if Hamilton and Clays ideas for a stronger central government were realized, that government would be despotic, as said government would start doling out "internal improvement" funds to favored parties in exchange for influence and power, and they would make promises to the people to support them in return for their votes.

[nuke'em ttg]

Winner winner, chicken dinner. IMO, the problem is the more power the politicians have to dole out, the more susceptible they are to being bought. Now the lefties will say the pols just don't have ENOUGH power. Well, if power corrupts, and absolute power corrupts absolutely, I'm not sure that's the answer we need...

that's it....we need a Revolution......have tailgaters take over Washington and give it brack to the people....we get weekends off though

[Yukon Cornelius]

the middle class has been under attack since 1980. I have said it here for years that without the middle class the country will fold. With the gap between haves and have -nots getting bigger things could get hairy.

[Ursa Majoris]

Winner winner, chicken dinner. IMO, the problem is the more power the politicians have to dole out, the more susceptible they are to being bought. Now the lefties will say the pols just don't have ENOUGH power. Well, if power corrupts, and absolute power corrupts absolutely, I'm not sure that's the answer we need...

Sad really, isn't it? Until we figure out how to stop politicians having to rely on rich lobbyists to be elected / re-elected, we're all just pissing in the wind.

[SEC=UGA]

1. We are not a demoracy

2. Special interest groups that fight for the down trodden have just as much political influence as do lobbying groups for big business and are equally represented, especially since this last election.

3. The middle class is shrinking because they are not appropriately evolving their skill sets to meet the demands of today's work environment. The days of $52 an hour assembly line jobs are gone, evolve or see your job shipped over seas.

4. FDR was a despot

5. Wealth envy articles play well because the majority of us are not wealthy and we assume that these other people who are wealthy somehow cheated their way to success. We perceive that we are just as smart as the highly successful, work just as hard, and somehow fell short of achieving what they have, thus they cheated and should be punished by forfeiting their ill gotten wealth.

6. Another "destabilizing" factor in any country is a diverse mix of cultures inhabiting a country, why do we not read more about that? (there is an interesting book about it that I read years ago, I'll have to look it up).

7. The people at the top earned there money, leave them alone.

[Ursa Majoris]

1. We are not a demoracy

2. Special interest groups that fight for the down trodden have just as much political influence as do lobbying groups for big business and are equally represented, especially since this last election.

3. The middle class is shrinking because they are not appropriately evolving their skill sets to meet the demands of today's work environment. The days of $52 an hour assembly line jobs are gone, evolve or see your job shipped over seas.

4. FDR was a despot

5. Wealth envy articles play well because the majority of us are not wealthy and we assume that these other people who are wealthy somehow cheated their way to success. We perceive that we are just as smart as the highly successful, work just as hard, and somehow fell short of achieving what they have, thus they cheated and should be punished by forfeiting their ill gotten wealth.

6. Another "destabilizing" factor in any country is a diverse mix of cultures inhabiting a country, why do we not read more about that? (there is an interesting book about it that I read years ago, I'll have to look it up).

7. The people at the top earned there money, leave them alone.

Crap.

 

The issue here is not the amount of wealth the top end has per se but the proportion of total national wealth that is concentrated there. Simple question:

 

Some years ago, the ratio of a CEO to the lowest paid worker was in the region of 1:70. It's now about 1:700. Why is that?

[westvirginia]

Crap.

 

The issue here is not the amount of wealth the top end has per se but the proportion of total national wealth that is concentrated there. Simple question:

 

Some years ago, the ratio of a CEO to the lowest paid worker was in the region of 1:70. It's now about 1:700. Why is that?

 

Everything he wrote isn't crap, but to answer your question, because those with money will buy influence and political power with it, further ensuring their continued ability to do so. Perch does go on and on but he's exactly right about one thing - the less we limit this government the more we will become like the feudalism we purport to despise. You have a very few nobles holding all the power because they can buy the politicians. Hell, randull even admitted in another thread that the DEMOCRATS who wrote the current bill are corrupt - how much more evidence do you need? :irishwink:

[SEC=UGA]

Crap.

 

The issue here is not the amount of wealth the top end has per se but the proportion of total national wealth that is concentrated there. Simple question:

 

Some years ago, the ratio of a CEO to the lowest paid worker was in the region of 1:70. It's now about 1:700. Why is that?

 

Because they earned it and have amassed the wealth over a number of years. What I would like to see is what % of the company's income the CEO's salaries are now versus then. THis is not money that is static and generally in the same hands, the number of millionaires in the US has increased as well, there are many newly rich people in this country, it isn't as if the Vanderbilts, Winchesters, Astors, Carneiges, and Edisons are the major power brokers in the country. The landscape has changed where we now have the Gates, Jobs, Blanks, Schneiders, etc... that have amassed money over the past 50 years. There will always be a changing of the guards and new individuals will become wealthy and this is base din large part on their ingenuity, hard work, and cunning.

 

Face it, Americans as a whole have become lazy and feel a sense of entitlement. We are not as hard working as previous geneartions and are not willing to work our way up through te trenches any more. You can see this exemplified in the construction industry, there is a huge disparity in the number of white and black American workers, the work is too "tough" and the work is perceived as menial. Americans are not going to accept these jobs and the "moderate" wages when they are constantly being told that they are getting screwed over by the power hungry CEOs/Owners.

 

Further, we are not an economy that provides or can sustain the high paying labor jobs that the middle class once had. The companies that were providing these jobs are going broke due to decreased profitability. They are experiencing decreased profitability due to bad pension, health care, and salary agreements that thye enetered into in years past. That coupled with lower priced foreign goods, and often better quality foreign goods, has effectively crushed their ability to sustain themselves.

 

Another aspect of this analysis, and your take that the CEOs are making too much, is the fact that even if we took the 100 million away from the CEO of Ford or Coca Cola or whomever and redistibuted it amongst the workers it would not amount ot a whole hell of a lot of money in each workers pocket.

[Azazello1313]

http://itcouldhappenhere.com/blog/frightening/

 

it could happen here! frightening!! Have to agree here!!!11!

 

here's another paper

 

The rise in American inequality has been exaggerated both in magnitude and timing. Commentators lament the large gap between the growth rates of real median household income and of private sector productivity. This paper shows that a conceptually consistent measure of this growth gap over 1979 to 2007 is only one-tenth of the conventional measure. Further, the timing of the rise of inequality is often misunderstood. By some measures inequality stopped growing after 2000 and by others inequality has not grown since 1993. This cessation of inequality’s secular rise in 2000 is evident from the growth of Census mean vs. median income, and in the income share of the top one percent of the income distribution. The income share of the 91st to 95th percentile has not increased since 1983, and the income ratio of the 90th to 10th percentile has barely increased since 1986. Further, despite a transient decline in labor’s income share in 2000-06, by mid-2009 labor’s share had returned virtually to the same value as in 1983, 1991, and 2001.

 

 

Recent contributions in the inequality literature have raised questions about previous research on skill-biased technical change and the managerial power of CEOs. Directly supporting our theme of prior exaggeration of the rise of inequality is new research showing that price indexes for the poor rise more slowly than for the rich, causing most empirical measures of inequality to overstate the growth of real income of the rich vs. the poor. Further, as much as two-thirds of the post-1980 increase in the college wage premium disappears when allowance is made for the faster rise in the cost of living in cities where the college educated congregate and for the lower quality of housing in those cities. A continuing tendency for life expectancy to increase faster among the rich than among the poor reflects the joint impact of education on both economic and health outcomes, some of which are driven by the behavioral choices of the less educated.

 

 

 

The issue here is not the amount of wealth the top end has per se but the proportion of total national wealth that is concentrated there.

 

why is that the issue? why isn't the issue the increase in living standards of the bottom 1%/5%/10% compared to what they were previously? seems to me that's far more relevant.

[dmarc117]

there will be no revolution. please keep moving, there is nothing to see here.

[bpwallace49]

Everything he wrote isn't crap, but to answer your question, because those with money will buy influence and political power with it, further ensuring their continued ability to do so. Perch does go on and on but he's exactly right about one thing - the less we limit this government the more we will become like the feudalism we purport to despise. You have a very few nobles holding all the power because they can buy the politicians. Hell, randull even admitted in another thread that the DEMOCRATS who wrote the current bill are corrupt - how much more evidence do you need? :irishwink:

 

When will you guys stop focusing on the current Admin and look at the big picture? This ball started rolling in the 1980's and got us to where we are today.

 

I truly feel sorry for Obama as he gets to reasp the whirlwind and crapstorm of decades of corruption and excess.

 

Kinda like getting promoted captain . . . . . . of the Titanic . . . .

 

I agree with YOU WV, becaue you hate gubmnet in evry incarnation. I am more cynical about Perch, due to his unflagging support for GWB and Reagan . . .

 

The whole SYSTEM needs fixin', not just one political party . . .

[SEC=UGA]

Although CEO pay has increased dramatically in absolute terms, data show that total executive pay as a percentage of corporate income – including gain from the exercise of options – has remained quite stable since 1982.

 

http://lawprofessors.typepad.com/securitie...ck-options.html

[Azazello1313]

When will you guys stop focusing on the current Admin and look at the big picture? This ball started rolling in the 1980's and got us to where we are today.

 

 

"stop your narrow partisan BS, blaming obama for everything, and look at the big picture. it's all reagan's fault!"

[bpwallace49]

Although CEO pay has increased dramatically in absolute terms, data show that total executive pay as a percentage of corporate income – including gain from the exercise of options – has remained quite stable since 1982.

 

http://lawprofessors.typepad.com/securitie...ck-options.html

 

And when those companies "fail" and are bailed out with taxpayer funds? How are these COO "leaders" held responsible? More options? Buyout packages in the millions? Golden parachute severance packages?

[Ursa Majoris]

Because they earned it and have amassed the wealth over a number of years. What I would like to see is what % of the company's income the CEO's salaries are now versus then.

Regardless of company revenue / income / profit, the percentage relationship between top and bottom has been stretched out by a factor of roughly ten in a short space of time.

 

Let's look at things in a very simple fashion: If Company X has a 10% increase in profit, why don't all it's workers, top to bottom, share equally in percentage terms in that profit increase, let's say 5% across the board? Assuming the low totem pole guy is employed there, he must be doing his bit towards profitability, no? Otherwise he'd have been sacked / outsourced / had his position eliminated. That 5% is still a crapload of money at the top but doing it this way would also fulfill the old (but true) cliche that a rising tide should float all boats, not just some. There are still companies that do things this way, BTW.

 

The oligarchy is large - it is not Gates and a few others. In fact, I'd say Gates has more than earned his money, as have a majority of the super-rich who started their own companies. Nevertheless, compensation, despite the occasional rumbling from a major investor, is largely a circle jerk where the people deciding comp levels sit on each others boards playing a game of mutual backscratching. Most shareholders are gigantic mutual funds etc, also in the back-scratching game. No-one in the game really wants to rock the boat.

 

Continual concentration of wealth is unsustainable and will result eventually in massive tax hikes, far beyond anything those alive now have ever seen. It happened once, it will happen again. Before that point is reached, it would be sensible for all parties to focus on reducing that level of inequality (not the inequality itself, no-one is advocating for communism here). There are many practical benefits to be gained from observing that old saw about rising tides.......

[bpwallace49]

 

"stop your narrow partisan BS, blaming obama for everything, and look at the big picture. it's all reagan's fault!"

 

Are you retarded? Did I exempt Clinton in that or state it was Reagans fault? This "perception" started in the 1980s . . .. who said ANYTHING in the gubment is the sole purview of the president . .??

 

stop jumping at shadows Az . . . it doesnt become you . . . .

 

Maybe you should have read the LAST line of that post "

[Ursa Majoris]

Although CEO pay has increased dramatically in absolute terms, data show that total executive pay as a percentage of corporate income – including gain from the exercise of options – has remained quite stable since 1982.

 

http://lawprofessors.typepad.com/securitie...ck-options.html

If that's the case, it clearly is not true for everyone else. In other words, corporate income increases have not trickled down.

[Perchoutofwater]

And when those companies "fail" and are bailed out with taxpayer funds? How are these COO "leaders" held responsible? More options? Buyout packages in the millions? Golden parachute severance packages?

 

Many of us have argued over and over they shouldn't be bailed out, that bailing companies out is an improper role of government. If they can't make it let them fail. When you start bailing out companies, where do you stop? Does one company get bailed in lieu of another because they are politically favored? Does one group benefit from a bailout because they are politically favored? Let companies live and die on their own, and you don't have to worry about it.

[bpwallace49]

Many of us have argued over and over they shouldn't be bailed out, that bailing companies out is an improper role of government. If they can't make it let them fail. When you start bailing out companies, where do you stop? Does one company get bailed in lieu of another because they are politically favored? Does one group benefit from a bailout because they are politically favored? Let companies live and die on their own, and you don't have to worry about it.

 

Perch define a "bailout". Do you think preferential business steered toward a company by an elected official is a "bailout"? Do you think that having political clout can protect CEOs from unethical behavior?

 

Outside of the bank bailouts we started last year and continued this year, it can be argued that corporate welfare "bailouts" are committed every day. From tax incentives from local municipalities to federal grants, the US contributes to growing that top % in everything it does.

 

To pretend that the "free" market doesnt cost everyone else is a fallacy.

[westvirginia]

Perch define a "bailout". Do you think preferential business steered toward a company by an elected official is a "bailout"? Do you think that having political clout can protect CEOs from unethical behavior?

 

Outside of the bank bailouts we started last year and continued this year, it can be argued that corporate welfare "bailouts" are committed every day. From tax incentives from local municipalities to federal grants, the US contributes to growing that top % in everything it does.

 

To pretend that the "free" market doesnt cost everyone else is a fallacy.

 

This market (the US) has quite a few socialist/facist elements to it. The free market doesn't cost - the one we have now though, does.

[bpwallace49]

This market (the US) has quite a few socialist/facist elements to it. The free market doesn't cost - the one we have now though, does.

 

Can you name ANY "free market" that exists WV? Seriously?