It took a Roman Catholic pope to make talk about income inequality acceptable. The President found his tongue and spoke up about it a couple of weeks ago. Last week, the American Academy of Political and Social Science announced that Joseph Stiglitz had won the 2014 Moynihan Prize, saying:
Stiglitz has contributed greatly to our understanding of the sources and dire ramifications of economic inequality in America, in works such as his most recent book, The Price of Inequality.
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Globalization, technology, and the devaluation of labor are the usual suspects blamed for leaving millions of Americans with little chance of getting ahead. This explanation is good enough for most people looking back to 1981 with a question: “Are you better off today.” Only the high-income uppermost crust is better off. Included in this class is the business elite who conceived, planned, and executed their vision which led to an impoverished middle class. In the top 1%, things are going very well. Their incomes quadrupled since 1981. Globalization, technology, and devalued labor don’t explain the phenomenal concentration of income and wealth that began in 1981 and continues today.
Economists, sociologists, and statisticians measure income inequality with a number that varies from 0 to 100, known as the Gini coefficient. A Gini value of 0 would indicate that income is equal for everyone in the population. A Gini value of 100 would indicate maximum inequality with one individual who has all of the income while the rest of the population has none. Income data the IRS collects each year from tax returns is a good source for calculating the change in Gini from year to year.
Gini is also a visual representation of income inequality. It can be seen when income data is plotted on a simple graph, a task easily automated with Microsoft Excel. The plotting reveals a curve that becomes more concave as inequality increases.
This is a picture of Gini that compares incomes from 1981 and 2011. The 45 degree diagonal line bisecting the square represents the default Gini value of 0 or perfect income equality. The two curves measure the increase in income inequality as a visual comparison. The curve closer to the straight diagonal was plotted with 1981 income data. The curve farther from the straight line is 2011 data. Inequality is the area between the straight diagonal and any curve. The area between the two curves is the increase in inequality between 1981 and 2011. |
Numbers are more precise than pictures for measuring 30 consecutive years worth of income data.
- From 1981 to 2011, Gini increased from 46.7 to 57.8.
- In 2007, it reached its record high of 60.1.
The rising income inequality trend began in 1981. Since then, there were three periods when inequality increased sharply.
- 1985-1988 - +5.3
- 1994-2000 - +5.3
- 2003-2007 - +4.5
Increasing inequality was interrupted and partially reversed three times.
- 2007-2009 – (-3.8)
- 2000-2002 – (-3.4)
- 1988-1991 – (-1.2)
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Pictures are more useful than numbers for comparing multiple data sets for correlation. For example, a chart of the stock market’s performance can be overlaid on the Gini fluctuations over any time period.
The long-term trend for both is clear. Income inequality increased as stock prices increased. Both peaked in 2007. (Income data for 2012 & 2013 isn’t available yet for comparison with the recent record market highs, but a corresponding increase in inequality is most likely.)
- The market decline from 2007 to 2009 coincides with a decrease in inequality.
- The dot com bubble bear market from 2000 to 2002 also coincides with a decrease in income inequality.
- Reversals in the stock market in October 1987 (the Dow lost 29% of its value in one day) and August 1990 (Iraq invaded Kuwait) correlate with a slight decrease in inequality.
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Correlation isn’t causation. It can be coincidental. Other economic indicators can be checked to see if they confirm a connection between the conditions they measure and inequality. Here, changes in GDP (blue spikes dropping below the zero line) and employment (black spikes dropping below the zero line)coincide with intermittent periods when inequality decreased.
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It takes a deep dive into the IRS income data to find the connection between the general economic and business climate and rising inequality.
Income reported by the top 1% isn’t like the income reported by the vast majority of everyone else.
- Only a small portion of the top 1%’s income is from wages and salaries.
- At the $1 million level, 70% of the income is categorized as investment earnings.
- At the highest income level, $10 million, 81% of income is classified as investment earnings.
The top 1% reported income sources like:
- Taxable and Non-Taxable Interest
- Ordinary and Qualified Dividends
- Capital gain distributions
- Sale of a variety of capital assets
- Property sales
- Partnerships
- S Corporations
The IRS income data confirms that prevailing business and investment conditions directly affect the top 1%’s income amount each year. The data also confirms a quantity of income and a volatility level with sufficient magnitude that drives Gini up or down from one year to the next. Average income for the top 1% is much more volatile compared to the median.
Start year - End year
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Income Change - Top 1%
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Income Change - Median
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1981-2007
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+290%
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-4%
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2007-2009
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-39%
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-2%
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2009-2011
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+16%
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+1%
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Cumulative income increased by $4.5 trillion between 1981 and 2011.
- The top 1% absorbed more than a quarter of the increase.
- Three-quarters of the increase was absorbed by the top 20%.
The income distribution profile for 1981 (in orange) overlaid on the income distribution profile for 2011 (dark blue) shows the 1%’s disproportionate share of the increase where the blue spike towers over the orange. |
When the overlay is reversed with 2011 income in front of 1981, an income loss across a broad spectrum of the population is visible. Percentiles 50-60, the core of the American middle class, lost the most ground.
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What can be concluded from understanding the underlying income numbers that drive the rising inequality trend?
- It is mathematically impossible to halt or reverse the long-term trend that continues to widen the gap between rich and poor with remedies that focus solely on the poor. Raising the minimum wage has value for the direct benefit it would provide at the low end of the income scale. It won’t have any significant effect on income inequality.
- The gap between rich and poor will keep getting bigger unless there is public policy that can halt or reverse the trend. Effective policy has to protect the public from the excesses that accompany extreme wealth. Meanwhile, it can be assumed that rising inequality reached a new record high in 2013, surpassing the previous record set in 2007.
- Just as a majority of Americans are experiencing the cumulative effect of business and government policy introduced during the 1980s, the top 1% with the immense wealth, power, and influence it has today is also an outcome of business and public policy introduced in the 1980s. When the capital gains tax rate was lowered and set below the regular income tax rate, inequality began to rise.
- It isn’t wealth that needs to be penalized. It’s the public interest and common good that needs to be protected. The extremely wealthy can easily accommodate risk that would be a crushing burden to people of average means. Even after a 39% drop in income between 2007 and 2009, the top 1%’s average was still over $900,000. Individuals that harm the public by their business practices or through speculation are responsible for their actions.
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The progressive spirit that was alive in the US 100 years ago left footprints for Americans to follow today. The words of President Theodore Roosevelt should never be forgotten:
"No man should receive a dollar unless that dollar has been fairly earned. Every dollar received should represent a dollar's worth of service rendered — not gambling in stocks, but service rendered."
"As a people we cannot afford to let any group of citizens or any individual citizen live or labor under conditions which are injurious to the common welfare."
"We stand for a living wage. Wages are subnormal if they fail to provide a living for those who devote their time and energy to industrial occupations. The monetary equivalent of a living wage varies according to local conditions, but must include enough to secure the elements of a normal standard of living--a standard high enough to make morality possible, to provide for education and recreation, to care for immature members of the family, to maintain the family during periods of sickness, and to permit of reasonable saving for old age."
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