Contributor Post Created with Sketch. Income Inequality is Rising Again. What Should We Think About That?

 

063015saez1Is this good news, bad news, or a bit of both? From the Associated Press and CNBC:

Incomes for the bottom 99 percent of American families rose 3.3 percent last year to $47,213, the biggest annual gain in the past 15 years, according to data compiled by economist Emmanuel Saez and released Monday by the Washington Center for Equitable Growth. “For the bottom 99 percent of income earners, this marks the first year of real recovery from the income losses sparked by the Great Recession,” Saez, a professor at the University of California-Berkeley, said in a summary of his findings. … Still, income inequality worsened in 2014. The richest 1 percent of Americans posted a much bigger increase in pay: their incomes soared an average of 10.8 percent to $1.3 million. The wealthiest 1 percent also captured 21.2 percent of all income in 2014, up from 20.1 percent the previous year.

Saez is that other French economist and inequality researcher (though he works with Thomas Piketty, author of Capital in the Twenty-First Century). A few thoughts here:

1.) It’s always worth pointing out what Saez means by “income.” It’s basically income from the private economy, but not including the safety net or employer benefits such as health insurance or retirement contributions.

Now that’s a lot, but it obviously isn’t everything. For example, using a more inclusive, after-tax income measure finds median incomes up about 40% over the past three decades versus flattish “market income” gains. The point here is that when you factor in total compensation plus the safety net, middle class incomes and consumption power are doing much better than Saez’s data would suggest. As the Manhattan Institute’s Scott Winship noted back in late 2013, “By 2011, the safety net had returned middle-class and poor households’ incomes to the highest levels ever seen. Since then, the situation has likely improved. Disposable income among the poor and middle class is probably at an all-time high.” Yay, safety net.

2.) Of course, I would prefer more of those income gains come from “market income” than the government or healthcare benefits. As Saez notes, “By 2014, bottom 99% families have recovered slightly less than 40% of the 2007- 2009 Great Recession losses.” (Again, not counting all that other stuff.) Faster growth would help a lot, though there are also reasons to worry a “rising tide” isn’t lifting and won’t lift all boats as in the past without (a) more economic dynamism and innovation, (b) more capable workers, and (c) expanded income supports.

3.) But when prosperity is broadly shared and upward mobility is robust, there is less reason to fret about rising inequality — especially if it comes from market capitalism rather than crony capitalism. See the below chart from Saez:

063015saez

Hey, incomes rose a lot during the much-revered Clinton expansion. And income growth for the 1% was five times as great as for the 99%. Overall, income going to the top 1% rose to 21.5% in 2000 from 14.2% in 1993. (And for the richest of the rich, the top 0.01%, the top income share rose to 5.1% in 2000 from 2.3% in 1993.) A rising tide wasn’t lifting all boats equally, but they were all getting a pretty good lift nonetheless. During the Obama expansion, however, top incomes are again rising about five times as fast as for everyone else, but everyday people seem to care a lot more since their income growth is tepid at best.

4.) Is high-end inequality just going to get more and more extreme? Here is a chart showing what it’s done each year since 1993 through 2014.

063015saez2

We’ll see.

There are 9 comments.

  1. Jim Kearney Contributor

    What we should think is “How can I profit from this?”

    A few years ago the answer might have been, “everyone is getting priced out of Manhattan. Buy Brooklyn real estate!” Too late now! According to this clip from the most recent episode of Odd Mom Out, “Brooklandia,” Park Slope and environs have already been colonized by progressive child-raising earth mothers.

    Liberals seem to have learned that the trick to trickle down is trickling first.

    So the question is, where’s the investor class headed next?

    (And no, discounted bonds issued by the Commonwealth of Puerto Rico are of no interest — even if the coupon claims 5.5%)

    • #1
    • July 1, 2015, at 11:26 AM PDT
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  2. Austin Murrey Inactive

    Is the income being measured by straight monetary gains, purchasing power or related income from, say, stock?

    Because all those millionaires and billionaires might be in a spot of trouble if, say, China erupted in a brutal civil war and the stock market tanked.

    In my mind the important thing to remember is not that income is disparate, but that purchasing power rises more or less steadily across all income brackets.

    There’s an easy case to be made that the poorest person in the U.S. today is better off than the richest king in the Middle Ages – he’s far less likely to die of an abscessed tooth. The poorest person at the turn of this century the U.S. is less likely to die from the flu than the richest person in the U.S. at the turn of last century.

    And the average American’s ability to buy a smartphone in the doldrums of the Obama economy is infinitely higher than in the go-go Reagan economy.

    Really you have to look at the cause of the gap instead of the fact of the gap. If in 2042 the richest person in our society could purchase a solid gold flying saucer to fly him to Jupiter for vacation and I had to settle for a renting a seat on the inter-planetary shuttle and sit next to someone who wanted to show me pictures of their cats for three hours I’m still doing better than I am today.

    If I have to shovel plutonium into the rich man’s nuclear furnace to power that flying saucer to receive my allotment of food for the day at the cost of $500,000 a plate it doesn’t matter that my income has risen in the last 30 years, my life is still worse off.

    • #2
    • July 1, 2015, at 11:34 AM PDT
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  3. Robert McReynolds Inactive

    The income gap is a false argument of the Left. The difference of income between the top and bottom doesn’t matter so long as the bottom has the freedom to strive for the top. The stat that needs to be looked at is the number of people who were in the middle ten or twenty years ago compared to the number there now. Or the median income in real dollars of the middle class compared to the median income in the 70s or 50s.

    • #3
    • July 1, 2015, at 11:52 AM PDT
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  4. MeandurΦ Member
    MeandurΦ Joined in the first year of Ricochet Ricochet Charter Member

    Why do you have to ask “what should we think”?

    I would rather see better measurements. How many people spend how much time at an income level? What age are they? Are people able to move up in income over their productive years, or do they get trapped at a level and stay there?

    Focusing on the “income gap” is playing right into the Left’s hands.

    Income Confusion by Thomas Sowell

    • #4
    • July 1, 2015, at 1:38 PM PDT
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  5. AIG Inactive
    AIG

    James Pethokoukis: Yay, safety net.

    By “safety net” they also mean earned income tax credits etc. I.e. all government transfers which aren’t necessarily “safety net”.

    James Pethokoukis: Of course, I would prefer more of those income gains come from “market income” than the government or healthcare benefits.

    Healthcare benefits are “market income”. They represent a portion of the compensation the employer pays to you.

    Jim Kearney: What we should think is “How can I profit from this?”

    That’s right! That’s what we should always be thinking. How about, buy stock in their companies?

    The problem is, the “average Joe” cashed out of the stock market in 2008, all the while the market increased by nearly 300% since then.

    So what’s the surprise?

    • #5
    • July 1, 2015, at 1:49 PM PDT
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  6. Robert McReynolds Inactive

    Dean Murphy:Why do you have to ask “what should we think”?

    I would rather see better measurements. How many people spend how much time at an income level? What age are they? Are people able to move up in income over their productive years, or do they get trapped at a level and stay there?

    Focusing on the “income gap” is playing right into the Left’s hands.

    Income Confusion by Thomas Sowell

    This is exactly correct. The premise behind “income inequality” is that people stay in the same income bracket their whole lives. Anyone not dumbed down by constant Leftist dogma knows that this simply is not true, although the Left would love to turn our system into one where you are locked into an income bracket from the moment you are born.

    • #6
    • July 1, 2015, at 2:01 PM PDT
    • Like
  7. Profile Photo Member

    Jim Kearney:What we should think is “How can I profit from this?”

    A few years ago the answer might have been, “everyone is getting priced out of Manhattan. Buy Brooklyn real estate!” Too late now! According to this clip from the most recent episode of Odd Mom Out, “Brooklandia,” Park Slope and environs have already been colonized by progressive child-raising earth mothers.

    Liberals seem to have learned that the trick to trickle down is trickling first.

    So the question is, where’s the investor class headed next?

    (And no, discounted bonds issued by the Commonwealth of Puerto Rico are of no interest – even if the coupon claims 5.5%)

    The investor class is, increasing, interested in Denver, Austin, San Antonio, and is testing the waters again in Phoenix.

    That’s just west of the Mississippi. I’m pretty sure Floridians can confirm greater investor interest there.

    • #7
    • July 1, 2015, at 3:49 PM PDT
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  8. Profile Photo Member

    Robert McReynolds:The income gap is a false argument of the Left. The difference of income between the top and bottom doesn’t matter so long as the bottom has the freedom to strive for the top. The stat that needs to be looked at is the number of people who were in the middle ten or twenty years ago compared to the number there now. Or the median income in real dollars of the middle class compared to the median income in the 70s or 50s.

    The problem I have with the “Income Inequality” argument is it sounds too much like Progressives are trotting that point out as a means of throwing spaghetti on the wall and seeing if it sticks.

    • #8
    • July 1, 2015, at 3:51 PM PDT
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  9. DubyaC Member
    DubyaC Joined in the first year of Ricochet Ricochet Charter Member

    I believe it was Milton Friedman who said (if memory serves): Societies that place freedom above equality do better by both than societies that place equality above freedom.

    • #9
    • July 1, 2015, at 5:27 PM PDT
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