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.

To have and have not: Economic growth and wealth distribution

How a flat tax is supposed to narrow the inequality gap is beyond me. The flat tax is an alternative to a progressive income tax, the latter does reduce inequality to some extent. If free markets lessen inequality it is difficult to explain how China has increased income inequality markedly since adopting a market system and integrating into the world economy.
This is the typical sort of ideological claptrap that goes by the name of economics at prestigious universities such as Harvard where Rogoff is a prof.This comes from the following website.


To have and to have not
Fundamental tax reforms and open markets are needed to balance the global distribution of wealth. It doesn't look likely in our lifetime.
Kenneth Rogoff


Lately, I have been trying to explain to my 11-year-old son Gabriel the astronomical differences between people's income.

Microsoft founder Bill Gates first penetrated Gabriel's consciousness a couple of years ago, when his father served as a warm-up act to Gates at a large conference sponsored by the Danish government. Ever since, Gabriel has been fascinated by the seemingly infinite possibilities of having $60bn.

For example, whenever I tell Gabriel that something is unbelievably valuable (even, say, a great painting in a museum), he invariably says, "But Bill Gates could buy it, right?" Yes, Gates could buy the whole museum. But then he would just turn around and give it back so everyone else can see it, so there is no point. Gabriel is not entirely convinced.

Gabriel has decided that if he can't become a professional basketball player when he grows up, then he'd like to buy a team. As an economics professor, I cannot help but ask him if he knows that it costs $300-500m to buy a National Basketball Association team. "But Bill Gates could do it. He could buy all the teams in the league, right?" Yes, I say. But if Bill Gates were to own the entire NBA, how would he decide which team to root for? Gabriel concedes the point, but I can tell that again he is not convinced.

Gates is not the only one who can easily buy teams and paintings. The latest Forbes list of America's wealthiest individuals showed that last year's highest nine earners, whose ranks include New York City's mayor, Michael Bloomberg, managed to increase their wealth by $5-9bn last year. Yes, that is just the annual increase in their wealth. Collectively, their $55bn in earnings outstripped the entire national income of more than 100 countries.

To put these astronomical numbers in perspective, I had Gabriel try to confirm that to be among the top nine earners in the US, you had to pull in at least $150 per second, including time spent eating and sleeping. That is $9,000 per minute, or $540,000 per hour.

How much do America's highest income earners make compared to the world's billion poorest individuals? Well, if the top nine donated their earnings, it would be the equivalent of about three months' income for the bottom billion. (Gabriel knows, of course, that Bill Gates and Warren Buffet have donated tens of billions already.)

As for the other nine months, given that the US accounts for only 25% of world income, it is a fair guess that there are some very wealthy individuals elsewhere who might be able to kick in. (Mexican telephone magnate Carlos Slim, for example, is a close competitor to Gates for the title of the world's richest man.)

Mind you, the idea that the ultra-rich could easily solve poverty is stupefyingly naive. Most serious academic research strongly supports the view that rich countries can best help poor regions like Africa by opening their markets, and by providing assistance in building physical and institutional infrastructures.

The greatest successes in fighting global poverty have come from China and India, two countries that have largely pulled themselves up by their own bootstraps. But this seems too complicated to explain to Gabriel just yet. So I retreat to the simplistic rock star/UN view of how great it would be if we could give more money.

Are massive income and wealth differences an inevitable outcome of fast growth? By and large, the answer from history is "yes". China, whose growth performance since 1970 has now broken every record, is well on its way to having the world's most unequal income distribution. Indeed, China has passed the US and is nearing Latin American levels of inequality.

Policy solutions are not easy. Many super-earners are also super-creative and bring enormous value. Places like the UK actively court wealthy foreign nationals through extraordinary preferential treatment of their investment income. The ultra-rich are an ultra-mobile group, too. If you are earning $540,000 an hour, it does not take too long to save up to buy an apartment, even in London.

Anyway, there are limits to how much tax pressure the political system can apply to the ultra-rich. Consider that any of the top nine American earners make more in two days than leading US presidential candidate Hillary Clinton raises for her campaign in a good quarter of the year.

Rather than punitively taxing wealth, globalisation strengthens the case for shifting to a flat tax on income (or better yet consumption) with a moderately high exemption. Aside from the usual efficiency arguments, it is just going to become increasingly difficult and costly to maintain complex and idiosyncratic national tax arrangements.

Unfortunately, movements towards fundamental tax reform are on the back burner in most countries. One can only hope that our children's generation will grow up to live in a world that does a better job of balancing efficiency and equity than we do. Gabriel says he is going to think about it.