Share of Income Gains by Quintile - Great Depression til Now

So the interesting question is not why economic inequality is increasing, but why for a few decades in the mid twentieth century the trend was reversed.

There are probably several factors at work here, but as someone who was around and paying attention at the end of that period, I think the key to the answer is the large corporation. The period of flattening coincides with the heyday of the large corporation.

Large corporations tend to decrease economic inequality. You can't measure individual productivity well within large organizations, and even if you could, it would strain the fabric of the organization to reward people that way. They also hide a lot of inequality by giving elite employees benefits that don't show up in their salaries (http://paulgraham.com/ladder.html).

What happened at the end of the 1970s was that the most ambitious people started to lose interest in working their way up the corporate ladder. They wanted to get paid upfront. That was why the term "yuppie" was born then. Before 1980 it was rare to find young professionals with lots of money. In the old days, they were all still paying their dues at that age.

I remember the transition quite clearly. When I was a little kid, in the early 70s, the most impressive thing you could do was to work for a large corporation. It was the era of conglomerates in shiny office towers. By 1980 we were starting to see a glimpse of the world we now live in, where the ambitious people are all free agents.

This means that people who get their income primarily from labor have lost a great deal of power vis a vis those whose income comes disproportionately from ownership of capital.

Questions and some guesses: 1) Why is this? If labor can extract less value, that would suggest that it has less bargaining power. That is, labor is more fungible. This fits in with what we experience as developers: one of the great emphases that (successful) companies place is on making developers replaceable and their labor roughly equivalent, through an increased emphasis on frameworks and general languages. It also makes sense for less professionalized labor. Heavy industry requires skills to operate effectively and runs the risk of shutdowns at centralized production facilities, while services and light industry are much easier workplaces to dominate workers.

2)How do the unemployed and underemployed fit in? This is complicated, as women have entered to workforce to make two-income households, while zero-marginal product men have left it as they cannot be employed profitably.

3) Was the threat of communism an enabling force for the middle and working classes in the "good times" leading up to the 80s when it finally started to crack and fall? Before the ruling class in the United States had to optimize the economy to be as effective as possible against the threat of Communism. This meant sacrificing some of its own well-being to buy off the rest of our consent for the ability to play a major role in geopolitics ( this buy off taking the form of concessions to unions, more forceful labor market interventions, healthcare, investments in public education).

4) Could the increasing inequality somehow be a statistical artifact? Smaller countries tend to be more egalitarian than richer ones. Most individual countries in the EU and states in the USA have a lower Gini coefficient than the EU or USA as a whole. Could a similar mechanism cause a larger and more sophisticated economy to feel pressures to become more unequal?

Its tricky to simply blame it on USA policies, as most Western countries have also become significantly less egalitarian than they were in 1970. Which isn't to say that US policies didn't cause it in the USA; it's just that those policies didn't appear in a vacuum, and you've got to identify the forces that caused it around the world.

Free trade is a powerful cause of both wage stagnation and purchasing power. Sure, eliminate free trade and the working class will see wages go up; but they'll spend those wages on $4000 plasma TVs and $50,000 economy cars.

To analyze whether this is "fair" or not, I think the best perspective there is Rawls's framework, which is the maxi-min idea. To summarize, the idea is that inequality is okay to the extent that it improves the minimum position. For example, if you start out with some totalitarian society where everyone makes $25k, it's okay for someone to start making $200k so long as it doesn't mean that someone else now makes less than $25k. Economically, that comes out as something like: it's okay for the top end of the wage spectrum to increase because they're producing more value and capturing that value for themselves. It's not okay for them to increase because they're capturing value that other people are creating instead. If someone making $500k starts making $1MM because they're producing $500k more in value, that's acceptable. If they do that and they're only producing $300k more in value, and the other $200k increase is coming from other people's productivity increases, then that's not "fair" and shouldn't be acceptable.

So, which one is it? Does anyone have a compelling argument? In the financial sector, for example, I think it's pretty easy to argue that it's the latter: people who privatize gains and socialize losses are enriching themselves far out of proportion to the value they create. When it comes to startups and new businesses, it often works the other way, in that the person starting the business, even if they become hugely wealthy, does so by creating even more value than they capture. I'm not sure it's obvious if what's been going on for the last 40 years is one way or another.

Wealth, however, is power. While Bill Gates may be no more capable than me at driving faster on the 101, I definitely can't pay a lobbying firm 10 million dollars a year to make sure government policy serves my interests, or secretly pay to have lies told in support of my cause by dozens of seemingly credible people.

Some proportion of people are going to be unethical, and there are > 400 billionaires in the U.S.

The conveniently ignored problem with rising wealth inequality is the power imbalances it creates, and the strong reinforcing feedback loops it enables.

[edited to fix typo]

Second, much of the top quintile gains have come out of the financial sector. You can see this in evidence by looking at the huge volatility in income through boom/bust cycles. This is bad.

Third, we're in a lopsided labor period where lots of low-end labor is available but labor capital production is actually quite low. This puts upward pressure on the price of higher value labor capital but downward pressure on raw labor capital. This won't continue as it's a byproduct of peculiar historic issues (namely communism, etc.).

Fourth, the information technology revolution has so far failed, I suspect for generational reasons. We've automated lots of low-end clerical jobs at large firms but that's pretty much where IT stalled.

In technology companies themselves, this doesn't appear to be an issue and technology seems to increase employment. It also tends to encourage additional technical fluency, which is then rewarded. But outside of technology itself, this pattern doesn't seem to hold. I suspect culture play a role here.

The NYT graphic tells a terribly compelling story that supports a particular political point of view. That tickles my bullshit sensor, and tells me it is time to question the underlying data and assumptions.

Frankly, this graphic makes me hear the sound of ideological axes grinding. That makes me want to question assumptions, data gathering, and data analysis. This is all thanks to Prof. Eyrich and his Stats and Econometrics classes way back when. (w00t Claremont McKenna College.)

I am not saying the graphic is wrong or it is right in the conclusions it suggests. I just find it telling that the discussion thread jumps straight to an Itchy and Scratchy Show level of discourse, without questioning the underlying data.

Where is HN's passion for analytic rigor? Or does A/B testing and statistical analysis apply to websites but not economics?

When they say that the 'Top Fifth' are all of the people in the labor force making over USD112541, does that mean that 20% of American workers make more than that?

That's pretty astounding to me, if it is indeed the case. At a labor force size of about 154 million people, that means that over 30 million people are making over USD112541. I know that a good number of people are making WELL over USD112541 actually, though I thought it was just because of my neighborhood and social group.

To see the aggregate numbers is staggering. Where is the money coming from to pay that many people that much? I have some inkling that this is what leverage and debt do for an economy, but ... wow.

Any econ profs, or grad students around to explain ho this is possible?

Left behind in America: Who's to blame for the wealth divide?

http://www.cbsnews.com/8301-503544_162-20102289-503544.html

First, start with "The relative stickiness of wages and prices" by David E. Spencer. http://findarticles.com/p/articles/mi_hb5814/is_n1_v36/ai_n2... It provides important background to the discussion of whether wages or prices 'stick' more, and provides an overview of the debate through '98.

Next, we turn to Martin Feldstein's paper, "Did wages reflect growth in productivity", 2008. http://www.nber.org/papers/w13953 He highlights two common errors with studies that find wages rose substantially slower than productivity. First, he explains that such studies focus on wages rather than total compensation. Without comparing productivity to total compensation, such studies are dangerously flawed. Second, such studies tend to poorly select the deflator when comparing productivity & compensation. Basically, the price index that's used to determine compensation is different than the price index used to calculate productivity.

For an even more recent discussion of the same problem, but within the context of Russia's economy, read "Productivity and Cost of Labor: How Statistical Illusions Are Born" by R. Kapeliushnikov, May '10 http://mesharpe.metapress.com/index/BW00W218X2143504.pdf. He explains:

  It seems that many of them are unaware of the difference between the 
  producer real wage and the consumer real wage. The former is estimated
  by deflating the nominal wage using the producer price index (PPI) or 
  the GDP deflator; the latter, by deflating the nominal wage using the
  consumer price index (CPI). One reflects the change in the price of 
  labor from the perspective of firms; the other, the change in the pur-
  chasing power of wages from the perspective of employees. Therefore, if 
  we want to answer the question of how expensive or cheap labor is for 
  firms, we should use the producer real wage, not the consumer real wage.

For the last couple of months Israelis are protesting about the economical situation around the country. The focus of those protests is the neo liberalist and capitalist direction the country took. You can search for #j14 on twitter. The protest demands among other things social justice, free education from the age of 3 months and free housing.

Last week 400,000 protested around the country. That's about 7% of the population.

Oh, and today S&P just upgraded Israel credit status to A+.

My billion dollar question: What happened at the end of the 70's / beginning of the 80's?

http://www.econ.berkeley.edu/~saez/

Under "Income and Wealth Inequality" on that page, click the link titled "(Longer updated version published in A.B. Atkinson and T. Piketty eds., Oxford University Press, 2007)".

It is an excel file that contains a metric ton of tables, charts, and figures. If you have a few moments and want a deeper understanding of the issue, that excel file is the best place to go.

(Edit: I just wanted to note one thing. My favorite graph from the excel file is figure 1B, where you can see that we are basically returning to where we were prior to World War II. It makes you wonder what was so different about the post-war period that resulted in this shift. Personally, I wonder if the sudden subsidization of education for returning veterans had anything to do with it, but I have no data on this right now, so...)

As far as my own thoughts on the issue go, I agree with pg. For a boring, academic take on it, there is a wonderfully dry 1980s paper by Rosen outlining the superstar theory:

http://www.ppge.ufrgs.br/giacomo/arquivos/ecop72/rosen-1981....

Basically, thanks to technology and globalization the rewards to individuals that have the highest levels of abilities have been magnified. Their "reach" has increased relative to those below them, and their rewards have increased in line with this.

While interest in this seems to be popping up all over the place due to the current economic catastrophe in progress, the idea that communications infrastructure improvements lead to income inequality is an old one.

Here is Alfred Marshall (founder of neoclassical economics) in 1890 (revision from 1920):

http://www.econlib.org/library/Marshall/marP54.html#VI.XII.4...

As for myself, I have no idea about whether this is a good thing or a bad thing (or whether anything could/should be done about the growing inequality). However, it is happening now, on a grand scale, so I think that it is important for everyone to have some context on the issue.

The only way to increase wages is then to proportionately increase demand for goods and services so that, despite the productivity gains, there is an increasing demand for labor.

We are also seeing automation (capital) and (cheap) overseas labor substituted for domestic labor beginning in the 80s. Consumer demand did not keep pace, so wages stagnated.

In other words, it could show simply a greater variance in income within individual lifetimes rather than a greater variance in income between people.

For instance, if people spend more time at school, but their incomes a few years after graduation are much higher, that would appear as a quintile disparity because they spent years in the bottom quintile (college and just after graduation), and then jumped into one of the top quintiles.

Similarly, as skills become more important, then (whether you go to college or not), you'll spend more time at low pay before your skill level matures, and then your income will rise rapidly.

Also, income is not wealth. Upper-middle class and rich people often spend a lot of time in the bottom quintile (unless they are so rich that they have a lot of passive income).

I'm not saying there isn't a problem. I don't have the data. But that particular measure is quite deceptive in my opinion.

I read until I find a fundamental error like comparing two values with different units. Only if it doesn't make any fundamental errors do I consider whether it's valid or makes any subtle errors.

What does one person's income have to do with anyone else's - why would you aggregate everyone's separate incomes into a single figure in the first place?

And if someone's particular income is insufficient to meet their needs, how do the aggregate population data help rectify that problem?

A bridge needs a thousand people to build but the idea of a personal computer only takes one genius to bring into fruition.

The productivity/compensation line conveniently starts in 1947 and makes the post-'70s era look unusual. In fact, the baby boom era was unusual -- with the possible exception of the first industrial revolution in Britain (1700s), it is without precedent in history. Two underlying factors are responsible: 1. the destruction of all other industrial nations in WWII (and consequent international demand for the dollar), and 2. cheap energy.

In 1947 the US had the world's only intact industrial infrastructure. This created tremendous overseas demand for our goods and our currency. As reconstruction abroad rapidly succeeded, the demand for the latter began to outstrip demand for the former, and we were all too happy to supply Eurodollars to meet it. By 1972, foreign claims on US gold reserves were totally unsustainable and Nixon unilaterally ended the Bretton Woods agreement.

Lightning struck twice on our shores with a sustained period of unbelievably cheap petroleum, which also ended in the 1970s. Recent work in thermoeconomics suggests that technology improvements are deflationary unless society can increase its gross energy consumption. Today's ICs are thousands of times faster than those of 1980, but they do not cost more. This is an efficiency improvement - a deflationary effect. (This deflation is largely missed by typical macroeconomic measures, which don't handle "hedonic" change well. The classic demo is to let people spend inflation-adjusted dollars in a catalog from 1980, and one from 2011. Nobody buys much from the older catalog.)

Building tract homes by the millions, on the other hand, requires increased gross energy consumption and is therefore monetized and reflected in measures like real GDP/capita. A similar issue exists around funding for "R&D". You can only fund the R. Since 1980, there's been an outright explosion in the number of scholarly publications disclosing promising breakthroughs, but breakthroughs can't penetrate society without energy. They sit on the page.

Today, we are a people harboring postwar expectations in a world of global competition and expensive energy. President Obama's recent speech was, like many he's given before, a populist appeal for a protectionist return to postwar conditions, when a high school diploma and a pulse could confer property ownership. Such measures cannot succeed.*

One of the most important roles of government in industrial society is to subsidize the production of energy. For the past 40 years, our government has sat idle (or even enacted counterproductive policies) while the real cost (EROI) of our energy sources has skyrocketed.

A common claim in connection with such graphs is that changes around 1980 are due to tax policy. I personally favor progressive taxation (and models suggest it can help with income inequality) but to suggest that tax policy is solely responsible for changes seen since 1970 is ignorant at best. And such claims are seldom accompanied by notice that all income quintiles (and all races) have marginally higher real income today than at any time in the past (effects of the great recession aside)... a moderately reassuring fact that would be left out only by someone attempting to tell a story. Psychologists know that income inequality has real, negative effects, so we should try to address it. But we mustn't do anything that would disturb the modest Pareto growth we have.

* Greenspun's comments on Obama's speech are also excellent: http://blogs.law.harvard.edu/philg/2011/09/08/obamas-speech/

Another thing to consider in terms of whether the rich “deserve” their money, or whether those rewards belong to the society that bestows them is the consolidation of labor. Consider Oprah Winfrey. She s probably only marginally better than the next best candidate for talk show queen. Yet she has amassed 100′s of millions while the next bes candidate for her job has no such job at alll. So we have two people, one tha is maybe 5% better at being a talk show queen, her income is 100 million, and another, 5% worse, and her income is some middle class wage like 50,000. Because of consolidation, the society only needs one Oprah Winfrey. We are paying 100 million to the role, not the woman. That’s the key point. She herself is worth 50,000 plus 5%, and the role of talk show queen, which could have been filled almost as well by many, many other people, is worth all the rest of the money. That role belongs to society, not to Oprahe Winfrey.

You see the same thing with CEOs, bankers, and others where consoliated and mass production allows only a few highly productive roles. The wealth associated with those roles, which is to say the consolidate dower, belongs to society not to the individual lucky enough to get to fill the role. This is why tax rates of 91% on the few that occupy the most consolidate roles was thoroughly appropriate and part of an economic approach that led to America’s greatest period of growth and general prosperity. High taxes on those who wield societies greatest powers on behalf of society are normative. The power, the influence they wield belongs to the society that allows and enables it, not to the individual who fills the role.

"""

[ comment by 'Sharn cedar' on 'DEAR RICH FOLKS: Get Ready For A (Tax) Revolution In Which Your Money Will Be Taken Away', http://www.businessinsider.com/tax-increases-are-coming-2011... - sic, a few typos uncorrected ]

The economic growth since 1978 was, for the most part, produced by the efforts of 10% of the population. It's true. I'm a leftist and I must admit that. That's not to say that the other 90% aren't working hard and don't deserve to share in the gains-- they obviously do-- but those gains are coming from a small percentage of people. Many, many people work hard and deserve to have good lives for their contributions, but only a small percentage (about 10%) have the vision and creativity to push increases in productivity; most are adders, few are multipliers. (Many politicians are dividers, but that's another story.)

The gains since 1978 have also gone to about 10% of the population. Maybe less than 10%. Income gains are often offset by increased prices in the Unholy Trinity (housing, healthcare, education costs). Quality-of-life is also going down in most of the country, and where it is increasing, housing prices are absurd even now. Even people whose incomes appear to be growing may be back-sliding. 10% is generous, but let's go with that.

These 10%'s are not the same people. (Sorry Randists). There's an intersection, but it's only about 2-3%, or 20-30% of each. The first set are the creators of wealth; the second set are capturing it. Startup entrepreneurs are in the first set (and if lucky, can enter the second). Well-connected rich kids who get staffed in private equity firms at 24 and get to draw fees from economic activity regardless of success or failure (because they'll get promoted anyway) are in the second set.

Speaking as a member of first set, and merely on the outer fringe of the second, I'll just say this: no, the economic inequality in the U.S. is not desirable. Hard-line egalitarianism is ridiculous and impractical, but inequality has gone too far. We know this. The only reason the absurdity is tolerated is that 10-30% of the American population has insane social and religious views that impel them toward degenerate politics.

Anyone who has traveled within Latin American societies at all can see where we're heading, and it's not pretty: massive economic inequality, desperate rural poverty, and intractably corrupt, plutocratic governments.

I'll admit that what bothers me most about American equality is what drives the inequality. If it were reflective of differences in intelligence, the correlation (slight, but positive) between intelligence and empathy would be enough to impel this smart-and-rich elite to give back to the rest. At least, I hope that is the case. But that's not what we have. Increasingly, the inequality comes from inherited social connections (social capital, mostly implicitly generational) and, as it increases, the decision-making elite becomes more insular. That's what most elites become (generational social networks, not meritocracies) and that is how societies rot.

thats an indictment of Fed which has probably intentionally caused all of the crisis in the usa in the 20th century , to benefit Fed-s owners - few commercial banks ..