Saturday, October 22, 2011

Income Inequality Explained by Demographics


From my post yesterday on the Enterprise Blog:

The Occupy Wall Street protest has returned national attention to the topic of income inequality; see recent commentary from bloggers Megan McArdle here and James Pethokoukis here and here. Both highlight empirical evidence that challenges the narrative that income inequality has gotten worse over time.

Most of the discussion on income inequality focuses on the relative differences over time between low-income and high-income American households, but it’s also instructive to analyze the demographic differences among income groups at a given point in time to answer the question: How are high-income households different from low-income households? Recently released data from the Census Bureau (available here, here, and here) for American households by income quintiles in 2010 allows for such a comparison: see the chart above (click to enlarge).

Bottom Line: American households in the top income quintile have almost five times more family members working on average than the lowest quintile, and individuals in higher-income households are far more likely than lower-income households to be well-educated, married, and working full-time in their prime earning years. In contrast, individuals in low-income households are far more likely to be less-educated, working part-time, either very young or very old, and living in single-parent households.


40 Comments:

At 10/22/2011 12:03 PM, Blogger arbitrage789 said...

Ultimately, the issue of tax rates will not be decided on the basis of what’s “fair”, but rather, on where the votes are in Congress.

The question of tax loopholes, however, is more complicated, and is decided to a large degree on the basis of “campaign contributions”.

Raising marginal tax rates will beget more loopholes, a phenomenon most people on the political left don’t understand.

 
At 10/22/2011 12:14 PM, Blogger Larry G said...

no matter how we discuss how to tax - it's grossly irresponsible to have a 1.3Trillion annual structural deficit and to have had it for years so that we have a 14+ trillion debt.

we can argue forever on who should pay or not but doing nothing just pushes everyone closer to the cliff.

The default should be to go back to Clinton/Reagan rates to move to a balanced budget and start paying down the debt - while we work on reforming the tax code.

we spend MORE on national defense right now than we take in income taxes - before we pay for anything else.

we've now spent 10 years doing this and all we have is excuses for why we can't do anything other than spend 1.3trillion more than we have.

 
At 10/22/2011 12:27 PM, Blogger spencer said...

Using your data you get that
average income per worker in the low income household is $22,987.5 and in the high income household it is $83,153.43.

This high income income per worker is 3.6 times the income per worker in the low income household.

So even using your data the number of workers per household does not explain the income difference

 
At 10/22/2011 12:56 PM, Blogger arbitrage789 said...

LG @ 12:14


I largely agree with your analysis, but given political realities what they are, we may be limited to the following two options for the foreseeable future:

a ) leave the overall tax burden where it is, and continue to run a large deficit, or

b ) raise the tax burden significantly, and continue to run a large deficit (although perhaps one which is slightly smaller than in (a)).

Either way, we’re going to keep piling on the debt until we can’t any longer. But given the two choices above, I regard option (a) as the lesser of the two evils.

 
At 10/22/2011 1:03 PM, Blogger Larry G said...

what is the likely outcome of option A?

do both have the same outcome?

 
At 10/22/2011 1:31 PM, Blogger arbitrage789 said...

LG @ 1:03


I think that, ultimately, the national debt will increase until it reaches some sort of critical mass. At that point, all three of the following will occur: (a ) tax increases, (b ) spending cuts, and (c) debt monetization.

The relative amounts of each will be hard to predict, but I think all of them will happen.

The debt monetization will certainly result in higher commodity prices, although it’s difficult to say exactly which currencies the US dollar will decline against (Europe and Japan are in no better shape than we are).

 
At 10/22/2011 1:44 PM, Blogger morganovich said...

"we spend MORE on national defense right now than we take in income taxes - before we pay for anything else."

that is simply not true.

in 2010, the feds took in 1.1tn in income taxes.

they spent $689bn in defense.

i think that number is too high, but it's certainly nothing like "more than we take in in income taxes".

the medi programs cost more than defense.

(793bn)

if you want to see where the huge mismatch is, it's entitlements.

fica took in $865bn in 2010.

medicare, medicaid, and SS cost $1.5tn.

http://en.wikipedia.org/wiki/United_States_federal_budget

 
At 10/22/2011 2:28 PM, Blogger Larry said...

Of course the reason they never look at the data this way is because the idea that one's lifestyle and choices may actually impact things like how well you do in life is anathema to most leftists. What they're striving for is equality of outcome, not equality of opportunity.

 
At 10/22/2011 2:32 PM, Blogger PeakTrader said...

Larry says: "We can argue forever on who should pay or not but doing nothing just pushes everyone closer to the cliff."

That's the problem. Too many people in the U.S. do nothing.

Those people need to work to pay their fair share.

America is still the land of opportunity.

If people are motivated, for whatever reason, they can earn over $50,000 a year with overtime and with little education.

 
At 10/22/2011 2:37 PM, Blogger arbitrage789 said...

morganovich

All the more reason why we can't afford Obamacare

 
At 10/22/2011 3:58 PM, Blogger Larry G said...

re: defense spending

Budget Breakdown for 2012

Defense-related expenditure 2012 Budget request & Mandatory spending[18][19] Calculation[20][21]

DOD spending $707.5 billion Base budget + "Overseas Contingency Operations"

FBI counter-terrorism $2.7 billion At least one-third FBI budget.

International Affairs $5.6–$63.0 billion At minimum, foreign arms sales. At most, entire State budget

Energy Department, defense-related $21.8 billion

Veterans Affairs $70.0 billion

Homeland Security $46.9 billion

NASA, satellites $3.5–$8.7 billion Between 20% and 50% of NASA's total budget

Veterans pensions $54.6 billion

Other defense-related mandatory spending $8.2 billion

NATIONAL INTELLIGENCE PROGRAM Classified[22]

Interest on debt incurred in past wars $109.1–$431.5 billion Between 23% and 91% of total interest


Total Spending $1.030–$1.415 trillion + Classified budget

http://en.wikipedia.org/wiki/Military_budget_of_the_United_States

re: medicare, medicaid, and SS cost $1.5tn

SS and Medicare Part A are not paid for with income taxes.

Medicare Part B = 210 billion
MedicAid = 500 billion +/-

 
At 10/22/2011 4:29 PM, Blogger Ironman said...

It's nice to see that some observers are finally catching on!

 
At 10/22/2011 6:36 PM, Blogger PeakTrader said...

This comment has been removed by the author.

 
At 10/22/2011 6:37 PM, Blogger PeakTrader said...

Bush tried to appease the Democrats by fighting cheap wars. Yet, Obama went hog wild.

Also, in the '50s, '60s, and part of the '70s, the U.S. spent over twice as much on National Defense as a percentage of GDP.

Share of Gross Domestic Product of Federal Government, Defense and Nondefense Spending, 2000-2010

Percent of GDP of Defense Spending

2000 ( 3.7)
2001 ( 3.8) Bush
2002 ( 4.1)
2003 ( 4.5)
2004 ( 4.6)

2005 ( 4.7)
2006 ( 4.7)
2007 ( 4.7)
2008 ( 5.1)
2009 ( 5.5) Obama
2010 ( 5.6)

BEA
Table 1.1.10. Percentage Shares of Gross Domestic Product
Line 23

(3.7% in 2000 is the post WWII low)

 
At 10/22/2011 6:41 PM, Blogger Larry G said...

re: " Bush tried to appease the Democrats by fighting cheap wars."

I thought it was Bush that said "deficits don't matter".

:-)

besides when have the Republicans ever cared what the Dems thought?

When the Elephant Clan had the Presidency and both houses of Congress they told the Dems to go sit down and shut up.

besides.. the Republicans are the ones who have traditionally derided the tax&spend Dems and claimed to be the fiscally responsible party.

 
At 10/22/2011 6:50 PM, Blogger PeakTrader said...

Larry, when Republicans move towards the left, they too often get the blame.

 
At 10/22/2011 6:53 PM, Blogger PeakTrader said...

Also, I believe, the last time the GOP had 60% of the Senate was in the early 1920s.

 
At 10/22/2011 7:26 PM, Blogger juandos said...

"The default should be to go back to Clinton/Reagan rates to move to a balanced budget and start paying down the debt - while we work on reforming the tax code"...

Wrong again as usual...

The default should go back to the Constitution where there were no clauses to allow the federal government to pander to the parasites...

 
At 10/22/2011 7:36 PM, Blogger juandos said...

"we spend MORE on national defense right now than we take in income taxes - before we pay for anything else"...

Typical liberal lie from the typical liberal...

 
At 10/22/2011 8:04 PM, Blogger Larry G said...

Budget Breakdown for 2012

Defense-related expenditure 2012 Budget request & Mandatory spending[18][19] Calculation[20][21]

DOD spending $707.5 billion Base budget + "Overseas Contingency Operations"

FBI counter-terrorism $2.7 billion At least one-third FBI budget.

International Affairs $5.6–$63.0 billion At minimum, foreign arms sales.

Energy Department, defense-related $21.8 billion

Veterans Affairs $70.0 billion
Homeland Security $46.9 billion

NASA, satellites $3.5–$8.7 billion Between 20% and 50% of NASA's total budget

Veterans pensions $54.6 billion

Other defense-related mandatory spending $8.2 billion

NATIONAL INTELLIGENCE PROGRAM
Classified[22]

Interest on debt incurred in past wars $109.1–$431.5 billion Between 23% and 91% of total interest

Total Spending $1.030–$1.415 trillion + Classified budget

real numbers and a lot more real that the Heritage offal.

sources:

^ "Federal Government Outlays by Function and Subfunction: 1962–2015 Fiscal Year 2011 (Table 3.2)". Retrieved 2010-12-21.

^ Table 8.5—Outlays for Mandatory and Related Programs: 1962–2014

^ Robert Higgs. "The Trillion-Dollar Defense Budget Is Already Here". Retrieved March 15, 2007.

^ Christopher Hellman. "America Spending More on Security Than Most Know". Retrieved September 30, 2009.

 
At 10/22/2011 8:07 PM, Blogger PeakTrader said...

Juandos, that's a very informative link.

 
At 10/22/2011 8:09 PM, Blogger PeakTrader said...

Larry, it would be useful to know how that compares to prior years or decades.

 
At 10/22/2011 8:13 PM, Blogger Larry G said...

well it would be... but the point right now is that if you total up all of the defense related outlays - they DO equal what we take in in income taxes.

If that data alarms you - it should.

it's about twice as much as we spent in 2000 though I do not have definitive data yet to show it (the base DOD budget in 2000 was 1/2 what it is now and that was also before 911, right?

 
At 10/22/2011 8:19 PM, Blogger PeakTrader said...

Larry, the U.S. government spent a lot more on National Defense as a percentage of GDP between WWII and Jimmy Carter (and a huge amount in WWII).

Of course, tax revenue remains much lower than 2007, because the economy hasn't recovered.

 
At 10/22/2011 8:36 PM, Blogger Zachriel said...

Mark J. Perry: The Occupy Wall Street protest has returned national attention to the topic of income inequality; ... Bottom Line:

But that doesn't explain why income inequality has been increasing in the U.S.

 
At 10/22/2011 8:38 PM, Blogger PeakTrader said...

Anyway, since the U.S. became an open economy after 1980, our trading partners financed much of the U.S. military, because the value of their U.S. assets, from up to $800 billion a year trade deficits, eroded at a compound rate from inflation, interest rates, and currency exchange rates.

 
At 10/22/2011 8:49 PM, Blogger PeakTrader said...

Zachriel, income is an incomplete measure of living standards.

Americans not only benefited from rising real compensation, but also from lower prices and lower interest rates.

Would you prefer a wealthy middle class and a much wealthier upper class with more inequality, or a poorer middle class and a poorer upper class with less inequality?

 
At 10/22/2011 8:51 PM, Blogger PeakTrader said...

Are you more likely to become rich hanging around a billionaire or a welfare recipient?

 
At 10/23/2011 7:56 AM, Blogger rjs said...

interesting to see that almost 23% of the top earners didnt work full time...

 
At 10/23/2011 8:41 AM, Blogger PeakTrader said...

RJS, many of them could've worked full-time for 50 years.

The 10 Biggest Sources of Retirement Income

Social Security
Retirement accounts
Pensions
Savings accounts and CDs
Stocks and stock mutual funds
Home equity
Part-time work
Inheritance
Annuities or insurance
Rent and royalties

 
At 10/23/2011 8:50 AM, Blogger Larry G said...

@peak -re: top 10

have you got a link for that?

it's interesting....

 
At 10/23/2011 8:51 AM, Blogger juandos said...

Robert Higgs: To estimate the size of the entire de facto defense budget, I gathered data for fiscal 2006, the most recently completed fiscal year, for which data on actual outlays are now available. In that year, the Department of Defense itself spent $499.4 billion. Defense-related parts of the Department of Energy budget added $16.6 billion. The Department of Homeland Security spent $69.1 billion. The Department of State and international assistance programs laid out $25.3 billion for activities arguably related to defense purposes either directly or indirectly. The Department of Veterans Affairs had outlays of $69.8 billion...

LMAO! What's next? Is Higgs going to classify the costs of roads running by the Pentagon or some army base as part of the defense bill also?

 
At 10/23/2011 8:56 AM, Blogger juandos said...

The 10 Biggest Sources of Retirement Income

 
At 10/23/2011 9:14 AM, Blogger PeakTrader said...

I knew a landlord who after WWII bought several houses over the years, while working full-time at ordinary jobs.

He owned four houses and turned them into rooms, e.g. 20 rooms, and retired mostly on rental income, e.g. $500 a month per room.

My brother-in-law works as an air traffic controller. When the stock market went down in 2009, I heard he lost about a quarter of a million dollars in his retirement account. I didn't know he had that much to lose. He's in his 40s.

 
At 10/23/2011 10:28 AM, Blogger PeakTrader said...

Juandos, Higgs also adds 91.2% of the interest on the national debt, or $206.7 billion, to the defense budget (which increases the defense budget by about 25% after all of his other additions).

 
At 10/23/2011 6:21 PM, Blogger Larry G said...

the categories that Higgs specifies are directly related to National Defense - protecting the country per the Constitution.

the trouble is that when you add it up - it's equal to or more than we take in in income taxes.

FBI counter terrorism, NASA spy satellites, military pensions and health care, are all legitimate national defense costs.

wherever you live in the US and in many places overseas there are military bases.

look at this list of military bases:

http://en.wikipedia.org/wiki/List_of_United_States_military_bases

@peak - thanks for the link!

not sure the rank order is based on dollars.... though

 
At 10/24/2011 8:31 AM, Blogger Jon said...

People in upper income groups tend to be better educated, work longer, and are less likely to be single parent families. But that was true before 1970 as well, right? What explains the change? It used to be that highly educated, wealthy people saw gains in income, and the poor did as well. Since about the mid 70's the gains to the wealthy have remained, but the gains for the poor have stopped. Saying the rich are better educated doesn't explain the change. That has always been true.

 
At 10/24/2011 12:30 PM, Blogger Ron H. said...

Jon: "People in upper income groups tend to be better educated, work longer, and are less likely to be single parent families. But that was true before 1970 as well, right? What explains the change?"

Perhaps changes in the distribution of these demographics, as suggested in the original post, reflect the changes in income distribution.

For a serious look at how good intentions have had unintended consequences, I highly recommend
Losing Ground: America's Social Policy 1950-1980 by Charles Murray. It will answer some of your questions about income inequality and changes in demographics.

Otherwise, what do YOU think the answer is?

 
At 10/27/2011 9:18 PM, Blogger Aiken_Bob said...

While interesting to me, given there will always be inequality - What is 'correct' amount and how to define what is inequality. I'm not sure there are answers to these questions that we could all agree to, hence why do we keep pushing the issue. To me the most important things are: 1) the makeup of the truly wealthy - the vast majority is new money, there is opportunity to advance, and 2) what we call poor today would be call wealthy a 100 years ago and middle class 50 years ago -- we are all rising.

 
At 10/31/2011 5:49 PM, Blogger CockSearch2009 said...

Interesint view of income inequality presented recently on PBS Newhour by an economist who figured out that the apparently alarming distribution of income flattens out significantly if one takes into account the value of 1. Social Security income, and 2. Medicare benefits.

Standard income inequality measures financial assets. SS and Medicare aren't financial assets, but they still are significant assets.

 

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