Friday, December 28, 2007

Income Inequality in the United States

Here is an article from this blog. I have invented a new theory to explain what happens when the economy grows. I am not sure what to name it. Originally I thought I would call it the trickle up theory to compete with the original trickle down theory. Unfortunately, the flow upwards is more like a gusher than a trickle. Even the original trickle down theory disguised the fact that when there is a trickle down there is almost always a much larger flow to the upper income earners. It would have been better termed the falling crumbs theory wherein the poor get more crumbs since it is a bigger cake.
Another pop theory is captured by the idea that a rising tide raises all boats. This is a real laugh when applied to economic growth. You can be sure that the extra money created by a growing economy is not shared equally in the way that a rising tide raises all boats big and small equally.

Boy, Have We Got an Inequality Problem
By Jared Bernstein | bio
The Congressional Budget Office (CBO) just updated their invaluable data series on income inequality and the results are startling. Income inequality among households, both before and after Federal taxes, grew more quickly over the last two years of the series, 2003-05, than over any other two-year period on record, back to 1979.

Over those two years, the growth of inequality transferred $400 billion dollars from the bottom 95% to the top 5%. That is, had the income distribution remained as it was in 2003, the income of each of the 109 million households in the bottom 95% would have been $3,660 higher in 2005.

If this is the ownership society at work, I think we need to have a serious talk with the owners.

EPI will post our analysis later in the day (the Center on Budget and Policy Priorities will also post their nifty analysis), but I wanted to share a few of our findings with you right away:

If we break households in groups of 20% each by income, well over half of household income (55%) was held by the richest fifth in 2005, the highest such share on record;
The share of income held by the top 1% has climbed from 9% in 1979 to 18% in 2005.
After-tax income of the bottom 20% grew 6%, or $1,800 over these years (1979-2005, in 2005 dollars); the middle-class gained $11,000, up 21%, over these 26 years. The average income of the top 1%, more than tripled, up 228%, for a gain $781,000.
By 2005, the average post-tax income of the bottom fifth was $15,300, the middle fifth: $50,200, and the top 1%: $1.1 million.
These hugely different growth rates have led to much greater economic distance between income classes over the years. Back in 1979, the post-tax income of the top 1% was 8 times higher than that of middle-income families and 23 times higher than the lowest fifth. In 2005, those ratios grew to 21 (top compared to middle) and 70 (top to bottom), a vast increase in the distance between income classes.

Lest we forget, before our current problems in housing and financial markets developed, the overall economy grew solidly over this recovery, with notably strong productivity growth. Aggregate household income, according to these CBO data, grew $1.1 trillion, 2003-05. But, to put it mildly, these gains have failed to flow broadly throughout the income scale, and the extent of their concentration at the top of the income scale is historically unique. Just under two-thirds (63%) of the gain in household income from 2003 to 2005 went to just 5% of the nation’s wealthiest households.

Such concentration of income is unsustainable in a democratic society.

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