Income Inequality In the US: A Primer
by Bonddad, Tue Jul 11, 2006 at 03:55:23 AM EDT
This index measures the degree of inequality in the distribution of family income in a country. The index is calculated from the Lorenz curve, in which cumulative family income is plotted against the number of families arranged from the poorest to the richest. The index is the ratio of (a) the area between a country's Lorenz curve and the 45 degree helping line to (b) the entire triangular area under the 45 degree line.
Among countries with modern economies, the United States is the clear leader in income inequality under the gini measure. Income inequality in the U.S. is more comparable to the third world.
The Census Bureau notes the trend of increasing income inequality started in 1968.
The most commonly used measure of income inequality, the Gini index (also known as the index of income concentration)1, indicated a decline in family income inequality of 7.4 percent from 1947 to 1968. Since 1968, there has been an increase in income inequality, reaching its 1947 level in 1982 and increasing further since then. The increase was 16.1 percent from 1968 to
1992 and 22.4 percent from 1968 to 1994.
According to the Census Bureau, the top 5% of US income earners have steadily increased their share of national income from 16% in 1969 to 21.1% in 1999. Those numbers are 41.3% to 48% for the top quintile of income earners.
Economists love to talk about "pies" and now would be a good time to use this comparison. I'll use the current national compensation figures to demonstrate the difference in each income level's respective share of national compensation. In addition, tax analysis is sometimes broken down into "quintiles". A quintile is simply a way of dividing all of the income earners into 20% brackets.
According to the Federal Reserve's Flow of Funds report, the national income pie was $11.491 trillion in the first quarter of 2006. Compensation of employees accounted for $7.329 trillion or 63%. According to the Census Bureau, in 1969 the top 5% took 16% of the national compensation pie, or $1.17 trillion of the current compensation pie. Using 1999's percentage that number would be $1.54 trillion or an additional $370 billion. For the top quintile, their 1969 percentage take would be $3.02 trillion of the current compensation pie and their 1999 percentage take would be $3.51 trillion, or an additional $497 billion. Comparing the difference between the 1968 and 1999 income distributions, an additional 6.78% of the national income pie went to the top quintile of income earners, leaving less for those in lower quintiles.
So, the top quintile is making more. That means by definition, the bottom three quintiles are making less. Again according to the Census bureau for the years 1969 - 1999 the fourth highest quintile saw its percentage of national compensation income drop from 23.6% in 1968 to 22.8% in 1999. This is a 3% drop. The third quintile saw its percentage drop from 17.3% to 15.3% or a 11.56% decrease. The second lowest quintile saw its percentage drop from 12.1% to 9.8% or a drop of 19%. The bottom quintile saw its percentage decrease from 5.7% to 4.1% or a drop of 28%.
In other words, the lower you are, the larger share of national income you have lost over the time period.
The Tax Policy Center has done a similar analysis for the years 1979 - 2002. Their analysis came to the same conclusion.
So - the short version of US income distribution over the last 30 years is straightforward: the rich are getting more of the national income pie.
So, why is income inequality such a big deal? Ask Marie Antoinette. But don't lose your head if she doesn't answer (A failed attempt at economic humor if ever there was one).
Seriously, income inequality at its worst is a cause of civil unrest. Suppose in hypothetical country A 10% of the people control 90% of the wealth. Eventually, the 90% of the people who aren't getting anything to live on will start getting angry, eventually overthrowing the ruling party. This was one of the primary reasons the Soviet Union was fairly successful during the Cold War period in going into countries with large Gini numbers and gaining political influence, access and eventually an ally. This partially explains Latin America's recent move to the political left as left leaning ideologies play well to a population where income disparity is wider. And when the US income distribution resembles the developing world rather than the developed world, it's important to ask questions like "is this a good thing?"
From a political perspective, this inequality in distribution completely explains why the Republican's economic poll numbers are so horrible despite having some good macro-level numbers to trumpet. Although US GDP grew strongly in the first quarter, 80% of the population looked around and say, "where's my piece of the pie? I see CEOs are making tons more than me - they're getting big raises, but I haven't had a raise after inflation since this expansion began. This stinks."
Perhaps most importantly, it raises interesting questions about tax policy. Inherent in these questions is the issue of fairness. What is a "fair" tax rate for a certain income level? When has someone paid "enough". These are all tough questions that have no easy answer. But they should be discussed and answered.
So, not only is the US a debtor nation in the tradition of Latin America circa the 1980s, we are also following a similar path in the area of income distribution. It's very important to ask ourselves: is this what we want?
A completely unrelated note
In addition to misrepresenting total US GDP and wage growth (and a host of other statistics), Larry Kudlow's recent column makes the following claim:
The U.S. Bureau of Labor Statistics is recognizing the importance of the small-business-driven household survey, and has suggested averaging household jobs with the corporate payroll survey to get a clearer jobs picture.
BLS has always maintained that both surveys are needed to provide a complete picture of the labor market [ed. note: This was not at issue], but BLS has not suggested that one should average the monthly household and payroll survey employment estimates, or the over-the-month changes of these figures.
That makes literally every factual assertion Larry made (save his name) in the article 100% wrong or incredibly misleading. At least he's consistent.
Bonddad provides economic analysis to Democratic candidates and causes with NRRSA
Thanks to CanYouBeAngryAndStillDream for emailing some of this information to me.