Trends and Cycles in Income Inequality: Why Oh Why Can't We Have a Better Press Corps?

Jason De Parle of the New York Times is better than this…

First: a little background:

Since the inauguration of Ronald Reagan and the consequent shifts in the regulation of financial and of labor markets that dismantled the various politico-economic forces that had kept the (white, male) distribution of income relatively tight in the two post-New Deal generations, there has been a reliable statistical relationship between the change in the stock market and the change in the income share of the top 1% of the population. When the stock market goes up, the capital gains income of the top 1% goes up--and so does the (wage and salary) income of corporate and financial princes exercising their stock options, and so does the (salary and bonus) income of traders and money managers.

This relationship can be disturbed. The income of the top 1% boomed in 1986 and then plummeted in 1987 as they shifted capital gains from 1987 to 1986 in anticipation of the rise in the capital gains tax rate in Reagan's 1986 tax reform bill. In 1988 finance boomed again as stock sales yielding capital gains recovered--but the stock market was still depressed below 1987 levels because of the Black Monday crash.

Otherwise, since 1980 you can bet that if the stock market goes down, the income share of the top 1% will go down as well.

And you can bet that when the stock market reverts to its mean and goes back up, the incomes of the top 1% will go back up as well.

The stock market went down in 2008 and 2009.

And the stock market went back up in 2010, has stagnated in 2011, and is likely to go up further in 2012.

Jason De Parle:

Recession Crimped Incomes of the Richest Americans: The share of income received by the top 1 percent — that potent symbol of inequality — dropped to 17 percent in 2009 from 23 percent in 2007, according to federal tax data. Within the group, average income fell to $957,000 in 2009 from $1.4 million in 2007.

Analysts say the drop largely reflects the stock market plunge, and most think top incomes recovered somewhat in 2010, as Wall Street rebounded and corporate profits grew. Still, the drop alters a figure often emphasized by inequality critics, and it has gone largely unnoticed outside the blogosphere….

“It’s very interesting that this has become such a big topic now when the numbers are back to where they were in the 1990s,” said Steven Kaplan, an economist at the University of Chicago’s business school. “People didn’t seem to be complaining about it then.”…

Critics of the Occupy Wall Street movement say the falling incomes at the top show that concerns about inequality are outdated. “We don’t want to spend years focused on income inequality, only to learn that the financial crisis fixed it for us,” wrote Megan McArdle in a blog post for The Atlantic. “Get a time machine, Occupy Wall Street,” wrote James Pethokoukis, a blogger at the American Enterprise Institute…

First, the correlation between top incomes and the stock market--and the implications of that fact for trends and cycles in recent income inequality--has not "gone largely unnoticed outside the blogosphere". It has been a topic in every single academic seminar on income inequality given since the recession started. At some point, somebody has said: "Of course, income inequality right now is well below its year 2007 Piketty-Saez peak. But that decline tells us very little about whether the long-term inequality trend is still operating."

Dean Baker comments:

The NYT Does He Said She Said on the Shape of the Earth and Income Inequality: The NYT doesn't know it, but the income of the rich rises and falls with the stock market because [top secret: they own lots of stock.] Sorry, but this piece on the decline in the relative income share of the top 1 percent is beyond silly. We know the income of those at the top drops in relative terms every time the market takes a dip.

Of course the stock market took a plunge in 2009, therefore we knew, even before we got the data, that their share of total income would fall. This is why it is very silly for the NYT to be interviewing people about whether there is now a reversal of the upward redistribution of income over the last three decades.

As they say in some parts, it's the stock market stupid. Don't waste readers time pretending it is anything else.

Larry Mishel comments:

On fairy tales about inequality: [T]here are three dynamics at play in the shift of income up to the top 1 percent and the top 0.1 percent. First, there’s the shift upwards in the distribution of wage and salaries, which also reflects the “realized option income” provided to CEOs that are counted as wage income. Second, there’s the shift upwards in the distribution of capital income… the top 1 percent reaped 57 percent of capital income in 2007, up from 38 percent in 1979. Last, there is a shift toward greater capital income and proportionately less labor compensation since 1979….

[T]he stock market declined more than a third from 2007 to 2009… realized capital gains at the top fell over 70 percent (according to the IRS data for those  with incomes $500,000 or more, which I will refer to as those with top incomes)…. However, the 20 percent gain in the stock market in 2010 should have helped top incomes recover a bunch of lost ground, don’t you think?… We also know that corporate profits are now substantially greater than they were before the recession. In fact, as Heidi Shierholz and I wrote in August, “In 2010 the share of corporate income going to profits was 26.2%, the highest share since the years during World War II, when national policy used wage and price controls to consciously suppress wage growth.” So, it seems that one of the dynamics causing greater inequality is certainly going strong….

The idea that income inequality is a thing of the past or has reversed itself is simply not true. Inequality did fall from 2007 to 2009, but remained way above the inequalities that prevailed 30 years ago. Everything we know about trends in 2010 shows inequality is recovering lost ground. I would bet that further ground will be recovered in 2011…

Larry Mishel and Nicholas Finio comment:

The financial crisis didn’t, and won’t, fix inequality: The incomes of the top 1 percent have fallen in the last two recessions because their incomes were disproportionately affected (through capital gains and stock options, among other things) by the steep decline in the stock market that occurred in the early 2000s and in the recent financial crisis. This decline in the stock market and incomes linked to it are disproportionately claimed by the rich, so this led to a temporary reduction in income inequality. After the early 2000s episode, high incomes and inequality rose quickly during the upturn as the stock market recovered. There is little reason to expect this not to be replicated in coming years after the sharp 2009 fall. People would be well-advised to keep this in mind….

The important part of the inequality debate is not to cherry-pick individual years where the rich suffer, or do exceptionally well, but to show the unmistakable trend over time. Temporary reductions in the relative income of the very rich are a common feature during recessions – but so far, the long-run trend of growing income concentration has re-established itself quickly after these cyclical downturns. Given this, it is most unlikely that the financial crisis has fixed income inequality.