New Data on Income Inequality

Greg Mankiw sees a little bit of good news in the latest income distribution data: after rising astonishingly rapidly from 1986 to 2000, income inequality in 2004 was no worse than in 2000:

Greg Mankiw's Blog: New Data on Income Inequality: In today's NY Times, Paul Krugman calls attention to the update of the Piketty-Saez data on income inequality, although Paul describes the data differently than I would.Here is what I see: After rising substantially from 1986 to 2000, income inequality is essentially the same in 2004 (the most recent year of data) as it was in 2000.

I hope he's right, and that the trend of rising inequality has stopped--it is a very disturbing phenomenon, and further rises would be very worrisome indeed. But I can't be as optimistic as he is. He sees an essentially flat trend from 2000-2004. I see numbers for 1999 and 2000 that may have been transitorily boosted by high salaries paid during the dot-com bubble, and then a decreased in inequality from 2000-2002--a decrease that is then reversed in 2003-2004, which carries us up to bubble levels.

So my hope that we might not see 1999 and 2000 levels of income inequality again appears to have been vain.

Comments

[baileyman]

Mankiw seems to be reaching into the data to justify his advocacy. Behind the scenes, unmeasured, is a dramatic skewing of the ownership of capital assets to the high end, partly due to tax cuts. When the yields on these kick in, the Gini will be off to the races. Meanwhile, the low end borrows.

[anne]

The terrific Piketty-Saez data are in no way assuring, rather they are not even a surprising demonstration of just how much income and wealth inequality is gaining and how how much more to expect from fiscal policy that has been increasingly designed to the benefit of the wealthiest. Wealth generates income, and tax law is insuring that increasing amounts of income will be tax favored. We are sadly in the beginning years of this newly revived move to inequality.

[Fred Hapgood]

> We are sadly in the beginning years of this newly revived move to inequality.

On a technical issue, wouldn't you expect a huge increase in inequality as the world organizes itself into single markets? Segmenting markets by nations -- as they still mostly are, of course -- must protect vast inefficiencies. As borders fall and all those segments rationalize against each other, the larger the stage on which actors with only marginal advantages over others will be able to leverage those advantages. Doesn't all this follow as the night the day? I suspect that growth in inequality will prove to be a major theme of the 21st century -- until or unless there is a bone-rattling global depression. Depressions (and wars) impose a strongly egalitarian direction on economies.

[kharris]

Fred,

Think about a low-wage, low-capital-intensity economy, in which there is lots of rent-seeking at the high end. Open that economy up. Are we likely to see income inequiality increase? I don't see what advantage the guys at the top gain when the ecoomy opens up. Certainly, there should be a shift of income toward "real" entreprenuers and away from rent-seekers, but why an abolute increase in income inequality?

Anne's point, though, is very well taken. Shield income from taxes at the high end, and income at the high end can grow progressively higher, relative to the low end. If we all tended to save the same share of income, the relative advantage income advantage to the rich would not be much affected by tax policy. Since the rich can affort to save more, they can grow ever richer, relative to the working stiff.

[anne]

Interesting comments, which we might follow on by thinking to the movement to income equality that began with the new deal and the movement away from equality from the turn of the 19th century. Suppose fiscal policy were what it was during Bill Clinton's years, would the movement away from income equality have stayed pronounced?

[erg]

To check Brads suggestion, I've regressed the Inequality data since 1986 (which is the year Mankiw refers to, so I'm not cherry-picking the data here...) against an index which is created from the real return of the US Stock market (using Shiller's data). The resulting R^2 is 0.79.

The high R^2 may be partially spurious (two things that happened to be going up at the same time), but it shows that the decrease in inequality in the early 2000's can easily be explained by the stock market alone.

This is torturing the data a little bit (OK, a lot...), but if you look at the last 3 presidents, and compare the change in Inequality to that predicted from the regression you get (multiplying the change by 100):

(Sorry, the spacing is ugly, but I can't figure out how to make this with a non-proportional font...)

President Actual Pred. Per
Change Change Year
Bush-I (89-93) 1.0 0.7 -8
Clinton (93-01) 2.7 3.3 +6
Bush-II (01-04) 0.7 0.1 -21

The per year numbers are multiplied by 100 again. So in fact, inequality grew a little more slowly than the regression would indicate under Clinton, and a little faster under the Bush's, especially Bush-II

[save the rustbelt]

"...Suppose fiscal policy were what it was during Bill Clinton's years, would the movement away from income equality have stayed pronounced?..."

Yes, I think so, We have destroyed 5 1/2 million manufacturing jobs (not churned, destroyed) and introduced millions of illegals into the labor market.

There are too many major forces running loose at the same time, no good news on the horizon.

[QWQ]

Take a look at the numbers that actually affect most Americans: Wages and Salaries.

In that category, inequality has gotten considerably worse from 2000-2005, with wages falling for the lower three quintiles, and rising for the top two quintiles.

CHART:
http://jec.senate.gov/democrats/charts/bush_earningsdistribution.pdf

DISCUSSION:
http://jec.senate.gov/democrats/charts/be_talkingpoints.pdf#page=4

[Fred Hapgood]

> I don't see what advantage the guys at the top gain when the ecoomy opens up. Certainly, there should be a shift of income toward "real" entreprenuers and away from rent-seekers, but why an abolute increase in income inequality?

There may well be no net gain to the "guys at the top" as a class, but the guys at the top who gain will gain a lot, thus leading to an overall increase in inquality, measured as the ratio of highest to lowest income. Assume a population in a segmented, pre-globalized, market; assume that the top decile in the society has incomes that average at around $5 and peak at $10. After global integration, the highest single income might be $100. The averages of either the highest decile or the society as a whole might not have changed much, but the ratio of highest to lowest income will have changed a lot.

[Fred Hapgood]

> Yes, I think so, We have destroyed 5 1/2 million manufacturing jobs (not churned, destroyed) and introduced millions of illegals into the labor market

According the the Bureau of Labor Statistics the number of manufacturing jobs has been roughly constant since 1960. Specifically, there were 15.4 million in 1960 and 14.4 million in 2004. See page 11 of CEPS Working Paper No. 119, among other authorities.

[dale]

Fred,
Wouldn't a constant number of manufacturing jobs over the past few decades be a real loss or diminishment of the sector given population growth and GDP growth? Constant numbers would show manufacturing declining in significance.

[Fred Hapgood]

> Wouldn't a constant number of manufacturing jobs over the past few decades be a real loss or diminishment of the sector given population growth and GDP growth?

Of course. But that was not the claim. The claim was that the number of jobs in the manufacturing sector had declined by 5.5 million. Rustbelt was quite careful in his choice of words: "... not churned, destroyed." Nothing like this actually happened.

[save the rustbelt]

Fred:

Did a quick Google reality check, and got 29,800,000 hits.

It seems to be accepted that the US lost about 3.3 - 3.5 million manufacturing jobs net from 2001 - 2006, down from about 17.4 million.

From 1995 - 2000 the numbers seem more variable, but it appears 1.5 - 2.0 million net were lost.

Very clever comparing 1960 to 2004, since the population was only about 160 million in 1960.

Do your own Google and see what you find.

[spencer]

ERG -- the Fed has done detailed research that concludes that the drop in savings is due to the stock market along the lines of your first brush with the data.

[Fred Hapgood]

>Do your own Google and see what you find.

Why? It's the Bureau that collects these numbers in the first place. If there is a higher authority I can't imagine what it could be. Check out the reference I gave you.

[Movie Guy]

Income inequality is not maxing out based on existing tax policy.

Speaking of which, where is the discussion about the effects of tax policy changes on income inequality?

What parts of the following presentations do people not understand?

NEW CBO DATA INDICATE GROWTH IN LONG-TERM INCOME INEQUALITY CONTINUES
January 29, 2006
CBPP
http://www.cbpp.org/1-29-06tax.htm

1979-2003 Capital Income Analysis
CBO Data Show Capital Income Has Become Much More Concentrated at the Top
January 29, 2006
CBPP
http://www.cbpp.org/1-29-06tax2.htm

The capital income that CBO analyzed consists of four sources: interest, dividends, rents, and capital gains.

2000
Lowest fifth - 0.9%
Second fifth - 2.1%
Middle fifth - 5.3%
Fourth fifth - 8.0%
Top fifth - 82.9%
Top 1 Percent - 49.1%

2003
Lowest fifth - 0.6%
Second fifth - 1.6%
Middle fifth - 4.3%
Fourth fifth - 6.1%
Top fifth - 85.8%
Top 1 Percent - 57.5%

Impact of Enacted Tax Cuts
April 10, 2006
CBPP
http://www.cbpp.org/4-10-06tax5.htm

Good read...

NEW DATA SHOW EXTRAORDINARY JUMP IN INCOME CONCENTRATION IN 2004
July 10, 2006
CBPP
http://www.cbpp.org/7-10-06inc.htm

"From 2003 to 2004, the average incomes of the bottom 99 percent of households grew by less than 3 percent, after adjusting for inflation. In contrast, the average incomes of the top one percent of households experienced a jump of almost 17 percent, after adjusting for inflation."

"The share of the pre-tax income in the nation that goes to the top one percent of households increased from 17.5 percent in 2003 to 19.5 percent in 2004. Only five times since 1913 (the first year that this data set covers), and only twice since World War II has the top one percent’s share risen by as much in a single year (in percentage point terms)."

"The share of total U.S. income that the top one percent of households received in 2004 was greater than the share it received in any prior year since 1929, except for 1999 and 2000."

Tax Facts
CBPP
http://www.cbpp.org/pubs/tax-facts.htm

Changes in Household Income: 1995 to 2004
Census Bureau
http://www.census.gov/hhes/www/img/incpov04/fig11.jpg

2004
Lowest fifth - 3.4%
Second fifth - 8.7%
Third fifth - 14.7%
Fourth fifth - 23.2%
Highest fifth- 50.1%

Percentage Change from 1995
Lowest fifth - (-8.5%)
Second fifth - (-4.5%)
Third fifth - (-3.2%)
Fourth fifth - no change
Highest fifth- 2.9%

Poverty: 1959 to 2004
http://www.census.gov/hhes/www/img/incpov04/fig06.jpg

We were back up to 37 million people in 2004. That's within 2.5 million of the period peak in 1959 and this level is headed back toward the slightly lower period peak of the 1990s.

Number of People Not Covered by Health Insurance: 1987 to 2004
http://www.census.gov/hhes/www/img/incpov04/fig15.jpg

45.8 million not covered in 2004.

Income inequality is not stabilizing.

Income inequality shall continue to grow as long as U.S. tax policy continues to support such disparities.

[save the rustbelt]

Fred:

No one cares what was happening in 1960.

We care about what has happened since NAFTA was passed in 1993.

[Fred Hapgood]

> We care about what has happened since NAFTA was passed in 1993.

Total manufacturing employment in Jan. 1993 was 18 million; total manufacturing employment in June 2006 was 16.4 million. Adds up to a total reduction of less than 9%.

Series ID # = LNU02034563

[Paul]

It's kind of like a new gilded age. After the first one, which started in 1870 or so, came the rise of the populists.

Gates, Buffet, Ellison, are sort of like Carnegie and Rockefeller. Gates and Buffet need museums, universities, and hospitals though to compete with the giants of the previous gilded age.

[Dirk van Dijk]

Paul,
Gates and Buffet are clearly following in the path of Andrew Canegie. The problem is not with them. I suspect that the Bill & Milinda Gates (esp with the Buffet contribution) will do far more good with the money than the federal gov't would do with it, even given the damage the deficits are doing to the economy long term. All the evidence is that they are being very smart in how they spend the money and insuring that they will be effective in helping relieve the suffering of the billions of people in abject poverty in the world. Bush would just spend the $ on something stupid, like a few more F-22's. The problem is more with people like tha Walton Family who are moving more along the path of the DuPonts in becoming economic royalists. The inheritance tax is a major incentive to setting up foundations. However even in the absence of the tax there will be some people who were simply raised right, and realize that their wealth should be used to benefit people, not to buy gold plated toilets or set their grandkids up as Dukes and Earls. Unfortunately, those people are a distinct minority among the super rich. Is there any way to make Carnegie's "The Gospel of Wealth" required reading among the super rich?