All Men Created Economically Unequal
The distribution of income in the U.S. has been growing more and more concentrated with each passing year since the early 1980’s. This is true whether you include capital gains income or leave it out, although the path is much more bumpy if you include capital gains.
The following graphs come from Emmanuel Saez, a professor of economics at U.C Berkeley (http://elsa.berkeley.edu/~saez/TabFig2007.xls). He, along with Thomas Piketty, published a most exhaustive study of income inequality in the U.S. in 2003. Saez has now updated his study through 2007.
While I am sure that the numbers including capital gains will come down for 2008, I’m not sure if the numbers excluding capital gains will change much for 2008. The data comes from the Statistics of Income division at the Internal Revenue Service. Those statistics are of extremely high quality and final, but come with a 2-year lag–year 2007 statistics were released on August 3, 2009.
First, let’s look at the share of total income earned by the top decile in this country. This is the total income earned by the top 10% of families as a percentage of total income. In 2007, the cut-off point to get into the top 10% was $109,630, which depending on what part of the country you live in could lead you to think that you were pretty middle class.
However, the share of total income including capital gains reached an all-time high in 2007, at 49.74% of all income. That’s right, the top 10% got half of all income and the other 90% split the other half. While 2006 was slightly higher, the previous peak level was 49.29% in 1928. If capital gains are excluded, we were not quite at the Roaring 20’s levels of inequality, but were close at 45.51% vs. 46.09% in 1928. The average from the end of WWII through 1980 was 32.3% excluding capital gains and 34.0% including them.
So has this increase in the share of income going to the top been mostly a function of relatively well-educated doctors, lawyers and engineers doing better? Is this just a case of increasing returns to education? One way to answer that would be to decompose the results.
Yes, people who are between the top 10 and the top 5 percent of income are probably well-educated professionals for the most part, or successful small businessmen. On average, you would expect them to have better educations than the people in the middle of the income distribution. However, people in the top 1% of the income distribution are not likely to have that much more education than those in say the 7th percentile.
The next chart decomposes the top 10% into the top 1%, the next 4% and the bottom half of the top decile. Looking at this chart, it is clear that is is not just a case of the relatively well-to-do doing significantly better. Rather it is the open-ended top 1% that drives the changes in the top decile.
Indeed, the share of total income earned by the bottom half of the top decile has been very stagnant. They represent 5% of the population, and in terms of income they are doing a little bit better than twice as well as the average. In 2007, this group gathered 11.9% of the pie, the same level it got in 1982, and just slightly above the 1945-80 average of 10.8%.
Similarly, the top 5 percent — excluding the top 1 percent — has seen only a gradual increase in its overall share of the economic pie. The increase, though, has been steady. In 2007, this group got 15.3% of the pie, up from an average of 12.5% from 1945 through 1980.
The numbers don’t change that significantly if one includes capital gains for the bottom two groups of the top decile. The bottom half’s share rises to 11.1% vs. an average of 10.7% in the post-war/pre-Reagan era. For the top 5% excluding the top 1% it was 15.2% in 2007 vs. an average of 12.8% from 1945 through 1980.
The real difference is at the top of the spectrum, where the top 1% saw its share of the pie expand to 18.3% vs. a 1945-80 average of 8.9%. Toss in capital gains and the difference is even bigger at 23.5% in 2007 vs. an average of 10.5%. Either way, you measure it 2007 just about matched the 1928 peak (19.6% and 23.9%, respectively).
Indeed, a very big proportion of the gain in income share for the top 1% can be traced to a relative handful of individuals — the top 1% of the top 1%. These modern economic royalists gathered 3.6% of the total income of the country in 2007, excluding capital gains, up from a post war/pre Reagan average of just 0.7%.
Of course for the very rich, capital gains are much more significant than for the average Joe, or even the average wealthy person. Including capital gains, this tiny group earned 6.0% of the total income in the country, up from an average of just 1.2%. Using the with capital gains figures that means that they were responsible for 36.9% of the total gain in share for the top 1%. Without capital gains they were responsible for 26.6%.
The economy has grown significantly since 1980, however, almost all the benefit has gone to a small part of the population. The report states:
“The implications of these fluctuations at the very top can also be seen when we examine trends in real income growth per family between the top 1 percent and the bottom 99 percent in recent years as illustrated on Table 2.
“From 1993 to 2007, for example, average real incomes per family grew at a 2.2 percent annual rate (implying a growth of 35 percent over the 14-year period). However, if one excludes the top 1 percent, average real income growth fall to 1.3 percent per year (implying a growth of 20 percent over the 13-year period). Top 1 percent incomes grew at a much faster rate of 5.9 percent per year (implying a 122 percent growth over the 14-year period). This implies that top 1 percent incomes captured half of the overall economic growth over the period 1993-2007.” (http://elsa.berkeley.edu/~saez/saez-UStopincomes-2007.pdf)
While the share of income at the very top is likely to come down rather sharply when the 2008 numbers are available, particularly including capital gains, it does not seem like the carriage trade will run into significant problems. There will still be people where price really is no object.
While the middle class is likely to trade down from shopping at Macy’s (M) and J.C. Penney’s (JCP) to shopping at Wal-Mart (WMT) and T.J. Maxx (TJX), there will still be a market for Neiman Marcus.
Read the full analyst report on “M”
Read the full analyst report on “JCP”
Read the full analyst report on “WMT”
Read the full analyst report on “TJX”
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