Monday, October 31, 2011

The "Imaginary Hobgoblin" of Income Inequality


The charts above were prepared using Census Bureau data (Table E-2) on the Gini coefficients (a statistical measure of dispersion that quantifies income inequality on a range from 0% for complete equality to 100% for complete inequality where one person receives all of the income) for full-time, year-round workers.  Like other measures of income inequality for families and households over time presented recently here, income inequality for full-time , year-round workers follows the same pattern: 

The Gini coefficient for full-time workers increased gradually through the 1960s, 1970, 1980s, and then stabilized in the mid-1990s (after rising from 34% in 1967 to 39.5% in 1994, see top chart) and hasn't changed at all in the sixteen-year period from 1994 (39.5%) to 2010 (39.7%).  

Bottom Line: Whether we look at Census Bureau data on Gini coefficients for U.S. households, families, or year-round workers, or look at the share of income going to the top fifth of Americans, there is absolutely no statistical support for the commonly held view that income inequality has been rising recently.  So why are we even having this national debate about solutions to the "non-problem" of rising income inequality.  Is this another "imaginary hobgoblin" (see below)?

H.L. Mencken: "The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary."    

38 Comments:

At 10/31/2011 9:30 AM, Blogger sethstorm said...

The problem with that is the lack of actual FT/non-temp work. That kind of work is being increasingly reserved for the few, with no non-political justification.

 
At 10/31/2011 9:30 AM, Blogger Zachriel said...

Perhaps this will shed some light.

http://www.cbpp.org/images/cms//6-25-10inc-f1.jpg

 
At 10/31/2011 9:58 AM, Blogger juandos said...

"Perhaps this will shed some light"...

No, it sheds no light since it references nothing...

The source material for that graph zach might be quite interesting though...

Got that link handy?

Meanwhile consider the following the Heritage Foundation: Why Does Income Inequality Matter?

'This is part one in a debate with liberal blogger Tim Mitchell on whether income inequality is a problem. In this post I lay out why income inequality isn’t a problem'...

 
At 10/31/2011 10:23 AM, Blogger Paul said...

"The problem with that is the lack of actual FT/non-temp work."

~Sethstorm, the same guy who told us awhile ago he is perfectly content to live off government programs the rest of his life.

 
At 10/31/2011 10:26 AM, Blogger Benjamin said...

Well, Dr. Perry, make up your mind.

If income inequality is neither bad nor good but just a market result, then who cares about the gini coefficient?

Few contend that employees in general are becoming skewed, in terms of income.

The top 1 percent do not get employment income, largely.

They get investment income, or capital gains.

 
At 10/31/2011 10:46 AM, Blogger Zachriel said...

juandos: No, it sheds no light since it references nothing...

Sure it does, the CBPP (Center on Budget and Policy Priorities) based on CBO (Congressional Budget Office) data. Here, with footnotes.
http://www.cbpp.org/cms/index.cfm?fa=view&id=3220

 
At 10/31/2011 10:50 AM, Blogger bart said...

It's not mostly about income inequality, although the top end of CEO salaries are ridiculous, but the 1% who own so much more than the 99% and are also way "over represented" in Congressional "favoritism".

History shows that type of unbalance hardly ever turns out well. OWS really does exist and there are very real issues, whether Dr. Perry chooses to see them or not.

 
At 10/31/2011 11:13 AM, Blogger Paul said...

bart,

"History shows that type of unbalance hardly ever turns out well."

..if you own a car, even a really ugly one, you're richer than 84% of the people
in the world.


I'm guessing you're better off than that. Give it up, Bart. Spread the wealth.

 
At 10/31/2011 11:31 AM, Blogger Che is dead said...

Don't forget that today, Halloween, is the perfect opportunity to teach your kids an important economic lesson.

 
At 10/31/2011 11:40 AM, Blogger ReasonableViews said...

Leaving aside the question of whether income inequality is growing (it seems intuitive that it is), what should we do about it?

The one indisputable suggestion is that better education would improve things. 40-50% dropout rates in our urban high schools cannot continue forever without taking a toll. Our 4 point prescription is here: http://bit.ly/vfu68c

 
At 10/31/2011 12:24 PM, Blogger marmico said...

So why are we even having this national debate about solutions to the "non-problem" of rising income inequality.

Because the income inequality ratios of the 95th to 50th (high income to median income) percentile and 95th to 20th (high income to the top of the bracket of low income quintile) percentile have been increasing non-stop since 1967. The 99/50 and 99/20 ratios would show even greater unequality. I haven't heard the OWS chant, "we are the 80%".

In 1967 the ratios were 2.66 and 6.33 and in 2010 they were 3.66 and 9.04, respectively. See Table A-3. In other words, for each dollar of recorded income of the median household, the high income household recorded income of $6.33 in 1967 and $9.04 in 2010.

 
At 10/31/2011 12:39 PM, Blogger morganovich said...

bunny-

as ever, you seem to miss the meat of the argument.

he's not arguing if it's bad or good. that's irrelevant.

what he is saying is that claims that inequality has been on the rise are provably false and therefore, even if it were a problem, it is not occurring.

mark's point, which you are missing, is that this whole thing is an invented problem with no basis in facts trotted out by scare mongering politicians looking to foment class war to buy votes.

whether of not a high gini is bad is irrelevant if it's not changing.

 
At 10/31/2011 12:43 PM, Blogger morganovich said...

marmico-

your distinction about quintiles is meaningless because class mobility is so high in the US.

go back and read mark's earlier post on this topic.

you start low, you move up, you drop down when you retire.

early career earnings are not up much, because there is not much you can do for the productivity of an untrained worker. peak career earnings rise much more because there are lots of productivity gains and that gets reflected in compensation.

you have identified a function of productivity, not durable income inequality.

The authors analyzed University of Michigan Panel Study of Income Dynamics data that tracked more than 50,000 individual families since 1968. Cox and Alms found: Only five percent of families in the bottom income quintile (lowest 20 percent) in 1975 were still there in 1991. Three-quarters of these families had moved into the three highest income quintiles. During the same period, 70 percent of those in the second lowest income quintile moved to a higher quintile, with 25 percent of them moving to the top income quintile. When the Bureau of Census reports, for example, that the poverty rate in 1980 was 15 percent and a decade later still 15 percent, for the most part they are referring to different people.
Cox and Alm's findings were supported by a U.S. Treasury Department study that used an entirely different data base, income tax returns. The U.S. Treasury found that 85.8 percent of tax filers in the bottom income quintile in 1979 had moved on to a higher quintile by 1988 -- 66 percent to second and third quintiles and 15 percent to the top quintile. Income mobility goes in the other direction as well. Of the people who were in the top one percent of income earners in 1979, over half, or 52.7 percent, were gone by 1988. Throughout history and probably in most places today, there are whole classes of people who remain permanently poor or permanently rich, but not in the United States. The percentages of Americans who are permanently poor or rich don't exceed single digits.

 
At 10/31/2011 12:54 PM, Blogger Zachriel said...

morganovich: The U.S. Treasury found that 85.8 percent of tax filers in the bottom income quintile in 1979 had moved on to a higher quintile by 1988 -- 66 percent to second and third quintiles and 15 percent to the top quintile.

The short term trend is dominated by young-to-old transitions. For instance, someone born in the upper classes, may start out with low income, but then begins the climb up the ladder, building on the family and school network of relationships.

As for the long term trend, "Both the United States and the United Kingdom stand out as having higher associations between fathers’ and sons’ earnings—and therefore less economic mobility—than do seven other industrialized countries"

Isaacs, International Comparisons of Economic Mobility, Pew Foundation

 
At 10/31/2011 1:05 PM, Blogger morganovich said...

zach-

that pew info flies in the face of every other datapoint i have ever seen about the US.

you have any actual data to back that up?

it sounds pretty suspect to me.

 
At 10/31/2011 1:07 PM, Blogger marmico said...

The Treasury study references absolute intragenerational mobility which is a zero sum game. By definition, for each move up, there must be a move down.

The percentile ratios are not a zero sum game. If by skill, luck, genetic lottery or otherwise, one moves to the 95th percentile in 2010, you have (9.04/6.33) 43% greater income relative to the median than in 1967.

 
At 10/31/2011 1:11 PM, Blogger morganovich said...

also:

it's totally incompatible with so much movement.

if 95% move out of the bottom 20% in 15 years, and half of the top 1% drop out every 10 years, it's pretty difficult to imagine that we have the sort of static social class system you'd need to have such a parental relationship.

there is also just no way that the US is higher than say, france of norway, where taxes are high, businesses are hard to start, and the rich pay virtually no taxes.

socialist systems are inherently homogenizing of wage earners, and keep social mobility to a minimum by inhibiting savings and business creation. they also stratify the aristocracy. if you are rich enough to make most of your income from investing, you pay zero taxes in most of europe. you just keep the money overseas.

they do not tax global income the way we do.

that's another huge wealth stratifier.

 
At 10/31/2011 2:13 PM, Blogger Don Culo said...

"Bottom Line: Whether we look at Census Bureau data on Gini coefficients for U.S. households, families, or year-round workers, or look at the share of income going to the top fifth of Americans, there is absolutely no statistical support for the commonly held view that income inequality has been rising recently.

******************
http://www.cbo.gov/ftpdocs/124xx/doc12485/10-25-HouseholdIncome.pdf

As a result of that uneven income growth, the distribution of after-tax household income in the United States was substantially more unequal in 2007 than in 1979:
The share of income accruing to higher-income households increased, whereas the share accruing to other households declined. In fact, between 2005 and 2007, the after-tax income received by the 20 percent of the
population with the highest income exceeded the aftertax income of the remaining 80 percent.

 
At 10/31/2011 2:30 PM, Blogger Don Culo said...

If I search the Internet I can find hundreds of sites which have studies to debunk the "Imaginary Hobgolin".

http://www.pbs.org/newshour/rundown/2011/03/income-inequality-gap-widens-among-us-communities-over-30-years.html

http://www.usatoday.com/money/economy/story/2011-10-27/income-gap/50952720/1

 
At 10/31/2011 3:53 PM, Blogger PeakTrader said...

More people should do something constructive, like generate real value to society, earn a billion dollars in the process, and create more income inequality.

 
At 10/31/2011 4:46 PM, Blogger Sean said...

Yes, it's not the "workers" that are affecting the gini coefficient. :)

 
At 10/31/2011 5:03 PM, Blogger sethstorm said...

Paul said...
Not as a first-choice solution, but as an absolute last-effort one. Navigating the red tape is not as good or easy as you think it is.

How about you try with an actual point? I'm just stating that there is a lack of work of that type, mostly due to purposeful withholding of it.

 
At 10/31/2011 5:09 PM, Blogger sethstorm said...


if you are rich enough to make most of your income from investing, you pay zero taxes in most of europe. you just keep the money overseas.

Perhaps the EU member nations' lack of military and intelligence reach should be addressed. While the US can help, those nations need to be willing/able to engage in pursuit/repatriation on their own.

It is kind of hard to put something somewhere if no part of the world is out of reach of a government. Shame that the US and EU can't cooperate effectively enough to thwart evasion, since it is a common problem.

 
At 10/31/2011 6:38 PM, Blogger juandos said...

"Sure it does, the CBPP (Center on Budget and Policy Priorities) based on CBO (Congressional Budget Office) data. Here, with footnote"...

Note there are NO actual CBO links, just questionable claims of CBO info...

Piketty-Saez debunked

 
At 10/31/2011 6:48 PM, Blogger Itchy said...

@Che is Dead:
Don't forget that today, Halloween ...

Hilarious, I'm going to have to share that.

 
At 10/31/2011 6:48 PM, Blogger juandos said...

"By definition, for each move up, there must be a move down"..

By who's definition?

5 Myths About the Poor Middle Class

By Stephen Rose
Sunday, December 23, 2007

 
At 10/31/2011 6:58 PM, Blogger Itchy said...

@Zachriel,

You cited that same study in the last post (again failing to provide a link) and you cut and past the same text highlight. I could be wrong but, I didn't actually see the correlation data.

The data do show that being having parents in the lowest quintile results in a higher likelihood of being in the lowest quintile for children when the reach adulthood.

The data also show that being born into the highest quintile gives the child a 64% chance of ending up in a lower quintile, about the same as everywhere else.

 
At 11/01/2011 8:42 AM, Blogger morganovich said...

"The Treasury study references absolute intragenerational mobility which is a zero sum game. By definition, for each move up, there must be a move down."

that's an interesting point, but i am still left wondering: what class are they picking? starting? highest achieved? how are they breaking it down?

with so much class mobility, it's very difficult to say you are X class. most people will be in several.

i was not even middle class early in my career. so is that my class? is it now? it it wherever i am at 65? that's a pretty slippery concept.

and how to they define class?

percentile?

upper, middle, and lower?

that makes for much more difficult mobility and misleading stats.

 
At 11/01/2011 9:50 AM, Blogger bix1951 said...

reality TV proves that class and money are not the same thing!

 
At 11/01/2011 12:41 PM, Blogger Zachriel said...

morganovich: that pew info flies in the face of every other datapoint i have ever seen about the US.

No, it doesn't. You just keep looking at the short term trend, even after it has been explained why that doesn't necessarily represent economic mobility. You might check the footnotes for details on the data and methodology.

morganovich: there is also just no way that the US is higher than say, france of norway, where taxes are high, businesses are hard to start, and the rich pay virtually no taxes.

That sort of cognitive dissonance can bring about a fresh look at one's preconceptions.

Itchy: I could be wrong but, I didn't actually see the correlation data.

The Isaacs paper is a review. See Corak, "Do Poor Children Become Poor Adults? Lessons from a Cross Country Comparison of Generational Earnings Mobility," Research on Economic Inequality 2006.

 
At 11/01/2011 8:59 PM, Blogger juandos said...

"You might check the footnotes for details on the data and methodology"...

Actually zach you could use a better source than the Keynesians at Center on Budget and Policy Priorities...

 
At 11/02/2011 8:01 AM, Blogger Zachriel said...

juandos: you could use a better source than the Keynesians at Center on Budget and Policy Priorities...

Are you saying the data is in error? It's sourced to CBO and reputable journals.
http://www.cbpp.org/cms/index.cfm?fa=view&id=3220

But if so, perhaps you could provide an alternative source.

 
At 11/02/2011 10:51 AM, Blogger Sigli said...

Spend all your money on products the rich make instead of buying businesses the rich shop at, then complain about those who did the opposite of you. What a great attitude.

 
At 11/02/2011 11:05 AM, Blogger juandos said...

"It's sourced to CBO and reputable journals"...

Reputable?!?! Who says those journals and the CBO are reputable?

The CBO is the propaganda arm of Congress and a little perusal of their past history would show you that...

Keynesians of any stripe lack credibility...

 
At 11/02/2011 11:34 AM, Blogger Zachriel said...

juandos: Reputable?!?!

So, in other words, you have no alternative source, don't know whether the data is reliable or not, and have no argument but to attack the source of the analysis.

 
At 11/02/2011 12:44 PM, Blogger Ian Random said...

I guess who cares? All it seems to me is a test, those who care about are idiots. Much like Jewish conspiracies correlate with nutters.

 
At 11/02/2011 2:41 PM, Blogger Ron H. said...

Sigli: "Spend all your money on products the rich make instead of buying businesses the rich shop at, then complain about those who did the opposite of you. What a great attitude."

Hmm...good point.

 
At 11/02/2011 9:50 PM, Blogger juandos said...

"So, in other words, you have no alternative source, don't know whether the data is reliable or not, and have no argument but to attack the source of the analysis"...

Well zach I've given you a couple of sources before and apparently you were either incapable of using them or ignored them...

So why the whining?

 

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