
Share of Income Gains by Quintile - Great Depression til Now - watmough
http://www.nytimes.com/imagepages/2011/09/04/opinion/04reich-graphic.html?ref=sunday
======
pg
Technological progress should cause increasing economic inequality, because
the bottom end of the scale is firmly anchored at zero (someone taking a
vacation), while technology gives the top end ever more powerful levers.

So the interesting question is not why economic inequality is increasing, but
why for a few decades in the mid twentieth century the trend was reversed.

There are probably several factors at work here, but as someone who was around
and paying attention at the end of that period, I think the key to the answer
is the large corporation. The period of flattening coincides with the heyday
of the large corporation.

Large corporations tend to decrease economic inequality. You can't measure
individual productivity well within large organizations, and even if you
could, it would strain the fabric of the organization to reward people that
way. They also hide a lot of inequality by giving elite employees benefits
that don't show up in their salaries (<http://paulgraham.com/ladder.html>).

What happened at the end of the 1970s was that the most ambitious people
started to lose interest in working their way up the corporate ladder. They
wanted to get paid upfront. That was why the term "yuppie" was born then.
Before 1980 it was rare to find young professionals with lots of money. In the
old days, they were all still paying their dues at that age.

I remember the transition quite clearly. When I was a little kid, in the early
70s, the most impressive thing you could do was to work for a large
corporation. It was the era of conglomerates in shiny office towers. By 1980
we were starting to see a glimpse of the world we now live in, where the
ambitious people are all free agents.

~~~
portman
_"Technological progress should cause increasing economic inequality_ "

Does that mean you are unfazed by growing inequality, and view it as an
unavoidable byproduct of progress?

Or do you believe economic inequality is a negative externality (like
pollution) that needs to be remedied?

~~~
pg
I don't automatically assume it's a problem, as so many people seem to. I
don't assume that all economic inequality is the medieval type, where the rich
are the winners of a zero sum game.

At the high end of the scale it doesn't seem to be a problem. I've seen a lot
of people go from middle class to rich when their startups succeeded. Most
live pretty quietly.

I would guess most of the damage done by economic inequality is at the low
end. I don't think there is much debate that societies should try to mitigate
that.

~~~
bermanoid
_I don't automatically assume it's a problem, as so many people seem to. I
don't assume that all economic inequality is the medieval type, where the rich
are the winners of a zero sum game._

The problem I see with growing income inequality is not the "inequality" part,
it's the "growing" one.

From a purely mathematical point of view, in any economic climate there's some
level of income inequality that's going to be economically optimal for
whatever it is that we want to optimize about our economy (some combination of
jobs, happiness, wealth, or whatever). This is trivially true, as zero income
inequality is a really crappy situation by most realistic measures of economic
health, as is ultimate income inequality (i.e. a small handful of people
holding all the wealth). In between those extremes there's _got_ to be some
optimal distribution of wealth.

But when I see a march towards higher levels of inequality, I'm left to wonder
whether there are actually any forces in play that will keep us anywhere near
that optimum, or if we're just seeing a runaway "wealth begets wealth"
situation, as folks like Mandelbrot have suggested. Sure, it _could_ be the
case that the changing technological climate means that the optimal level of
inequality is going up, and we're actually keeping pace with that, but that's
just a "could be", and I've never seen a particularly compelling argument that
our economy should work more efficiently now at higher levels of income
inequality than, say, twenty years ago. An argument that increasing income
inequality is inevitable, or even that it's fair, is _not_ an argument that
it's economically helpful.

I completely agree with your thesis that technology is a perfectly valid
reason for the growing gaps, FWIW, it's a pretty unassailable argument. But I
don't agree that it's not cause for concern: we're sliding at an increasing
pace down the slippery slope, and at the bottom is complete human level AI,
where a vanishing percentage of humans have anything at all of value to offer
to the economy. Are you _really_ comfortable with the wealth distribution
that's going to result from such a thing?

Personally (and this is quite controversial, I admit), I think that we have to
start taking that inevitable outcome to heart, and realizing that the next 50
years should be a period where we move a lot closer to a full welfare state,
with full acceptance of the fact that more and more of us will be at the
unemployed and useless end of the spectrum as time goes on. Then again, an
economy where humans are less useful than their machines, even as far as
designing and running those machines, is a completely different world than
we've ever considered before, so perhaps it's premature to even consider what
that means...

~~~
firebones
Robert Reich had a piece on NPR's Marketplace the other night [1] that seemed
to contribute to this idea: the notion that while some were accepting 9%
(rather than 6%) as the "new normal" in terms of unemployment rate, this was a
calamitous development. If you imagine a correlation between unemployment and
economic inequality, then at one end of the spectrum, high unemployment and
economic inequality leads to anarchy; as you slide down the scale, you pass
through revolution, civil unrest, and malaise.

Let's assume that the optimum is farther down the spectrum (somewhere around
"sustainability" but not so giddy as to be in "bubble" or "artificially-
crafted giddy delusion"). Then what are the forces at play to drive us there?
From a political standpoint, it's electability; yet if we're too far into the
inequality part of the spectrum, the fixes take more than an election cycle,
and therefore require strong political leadership or near dictatorship (think
FDR and no term limits as a model; think Japan and its many prime ministers
over the last decade and stagnation as the counterexample). That's not
promising since it may mean only the Senate, with its six-year terms and only
1/3 of the membership up for re-election has a long enough time-frame to do
what's needed.

But what about from a business perspective--what incentives and forces are
there today in business to try to close that income gap? Henry Ford allegedly
paid well and understood that he needed to create a market for what he made,
yet the auto industry today can't close that gap alone. If Apple's prominence
in the economy is comparable to Ford's, what hope is there that the jobs they
create in China will create a positive feedback loop of income equality?
Perhaps with a global perspective it will.

Therefore, I come to the conclusion that the Ford Motor of the 21st century
will be a company that is able to further its own market by empowering its
customers (and the common, untrained person) to become value creators from an
economic standpoint. You see Google and Apple and even eBay nibbling around
the edges, but who is going to emerge that harnesses and transmutes that
latent economic power?

[1]
[http://marketplace.publicradio.org/display/web/2011/09/07/pm...](http://marketplace.publicradio.org/display/web/2011/09/07/pm-
the-new-normal-not-so-normal/)

~~~
WalterBright
>Henry Ford allegedly paid well and understood that he needed to create a
market for what he made,

Ford paid well because that was the only way he could attract workers to do
the relatively boring assembly line work.

The idea of paying people to buy your products is simply not a viable business
plan. Ford created the market by making the cars cheap so ordinary folks could
afford them.

------
scarmig
The first graph is the most interesting. Productivity has increased
substantially while wages have remained relatively stagnant. More of the
surplus value of labor has been accumulating to capital.

This means that people who get their income primarily from labor have lost a
great deal of power vis a vis those whose income comes disproportionately from
ownership of capital.

Questions and some guesses: 1) Why is this? If labor can extract less value,
that would suggest that it has less bargaining power. That is, labor is more
fungible. This fits in with what we experience as developers: one of the great
emphases that (successful) companies place is on making developers replaceable
and their labor roughly equivalent, through an increased emphasis on
frameworks and general languages. It also makes sense for less
professionalized labor. Heavy industry requires skills to operate effectively
and runs the risk of shutdowns at centralized production facilities, while
services and light industry are much easier workplaces to dominate workers.

2)How do the unemployed and underemployed fit in? This is complicated, as
women have entered to workforce to make two-income households, while zero-
marginal product men have left it as they cannot be employed profitably.

3) Was the threat of communism an enabling force for the middle and working
classes in the "good times" leading up to the 80s when it finally started to
crack and fall? Before the ruling class in the United States had to optimize
the economy to be as effective as possible against the threat of Communism.
This meant sacrificing some of its own well-being to buy off the rest of our
consent for the ability to play a major role in geopolitics ( this buy off
taking the form of concessions to unions, more forceful labor market
interventions, healthcare, investments in public education).

4) Could the increasing inequality somehow be a statistical artifact? Smaller
countries tend to be more egalitarian than richer ones. Most individual
countries in the EU and states in the USA have a lower Gini coefficient than
the EU or USA as a whole. Could a similar mechanism cause a larger and more
sophisticated economy to feel pressures to become more unequal?

Its tricky to simply blame it on USA policies, as most Western countries have
also become significantly less egalitarian than they were in 1970. Which isn't
to say that US policies didn't cause it in the USA; it's just that those
policies didn't appear in a vacuum, and you've got to identify the forces that
caused it around the world.

~~~
Hyena
The main problem statistically is how we account income. Generally the
employer-paid health insurance and other benefits are not included, even
though these can often vastly increase total compensation. Scott Winship did a
good job following this but tends to shade into triumphalism.

~~~
scarmig
At least the top graph about productivity refers to "overall compensation."

I don't have a chance to find the original source for the numbers, but unless
the graph has been grossly mislabeled, benefits are probably included.

~~~
Hyena
"Overall compensation" refers to salary plus bonus and options, rarely does it
include things like health insurance, employer payroll taxes and the like. If
it did, the lower numbers would be much higher than they are, IIRC.

------
adamjernst
This analysis also ignores actual purchasing power (non-core inflation). Wages
may have stagnated, but purchasing power for non-core goods has soared.

Free trade is a powerful cause of both wage stagnation and purchasing power.
Sure, eliminate free trade and the working class will see wages go up; but
they'll spend those wages on $4000 plasma TVs and $50,000 economy cars.

~~~
forensic
People making your argument always mention TVs, they never mention rent, land,
food, education, childcare, or healthcare.

1\. Rent

2\. Land

3\. Food

4\. Education

5\. Childcare

6\. Healthcare

You know, the stuff that actually matters.

I'll give up my $400 LCD TV to be able to afford having my spouse stay home.
No problem.

I'll give up my Hyundai to be able to get a degree on the cheap like they did
back in the 60s.

I'll give up 100% of my silicon-based technology if in exchange I can afford
to own some land. Easy choice.

If I have to become a silicone-smashing luddite to return to 1960s level
wealth, fine. I don't love computers THAT much.

~~~
learc83
Repost of something I wrote the other day that I think is relevant:

My very average house today is a huge luxury compared to the very average
house my grandparents bought in the 60s. I have a cable bill, an iPhone bill,
an internet bill, a netflix bill, and too many various SaaS subscriptions. My
grandparents had none of those.

I also have a much higher power bill to pay for all my consumer electronics
and air conditioning, a higher health insurance bill to pay for drastically
better health care, an extra car insurance policy.

That's in addition to all the extra stuff I have lying around. 2 cars, not
one, both of which are vastly superior and more expensive than what my
grandparents had. Superior home appliances. And 1 metric tonne of electronics.
I have so much more material wealth than all but the very richest did just 50
years ago. How could I complain that I'm not better off?

~~~
illumin8
You wrongly equate material possessions with happiness.

I'd easily go back to a 60s quality lifestyle if my wife didn't have to work
and I only had to work 40 hours a week to own a nice house.

In the 60s they had most of the same electric appliances that we have today,
save the microwave oven, personal computer, and the cellphone.

I'd bet that eating food that can't be heated in a microwave is probably more
healthy for you. Losing the PC would be a real loss, especially the Internet.
Losing the cellphone is probably worth it, since we'd have landlines and can
still call anyone we need to.

You say we have all of these great things, but most of them are not important
to living a quality life. Having time to spend with your family without having
to have two wage earners working 60-70 hour weeks is worth more than a flat
screen TV and a second car will ever be.

~~~
learc83
Why don't you go back to a 60s lifestyle? It is definitely possible; plenty of
people live low impact non material focussed lives.

My point is that there is a reason that it takes 2 incomes to support a
household now--All the extra stuff we have. I was refuting the people who keep
asking why we have to work so hard just to have a normal life.

~~~
usaar333
I don't share grandparent's views of the 1960s, but the cost of additional
material goods are trivial.

The main reason you need 2 incomes to support a household is because you
assume you have 2 incomes when building the household. In other words, (if 1
income was desirable), a couple lives in way too nice of a house. They also
end up with two nice cars instead of one average one and probably eat out more
than they could afford on one income. That's pretty much it; all other costs
are trivial.

(Practical example: I'm paying $12,000 a year for a room in San Francisco. Car
probably runs around $3,500. In comparison, the price of all my aggregate
post-1960 technology -- cell phones, computers, internet, etc. is well below
$3,500 -- the price of the car.)

~~~
illumin8
It's not extra stuff, it's the price of housing and education. You might be
perfectly fine living in a single room in SF, but what if you have a family
and actually care about what school your kids go to? Maybe you don't want to
live in a neighborhood where there is crime right out in front of your house
all day long.

------
akeefer
There's one question, regardless of if you believe this is "fair" or not,
around whether structural inequality at this level is harmful to society
regardless of fairness. I tend to believe it is, based on historical precedent
of what happens in highly unequal societies (it tends to not be good), but
that's a separate question from the one about fairness.

To analyze whether this is "fair" or not, I think the best perspective there
is Rawls's framework, which is the maxi-min idea. To summarize, the idea is
that inequality is okay to the extent that it improves the minimum position.
For example, if you start out with some totalitarian society where everyone
makes $25k, it's okay for someone to start making $200k so long as it doesn't
mean that someone else now makes less than $25k. Economically, that comes out
as something like: it's okay for the top end of the wage spectrum to increase
because they're producing more value and capturing that value for themselves.
It's not okay for them to increase because they're capturing value that other
people are creating instead. If someone making $500k starts making $1MM
because they're producing $500k more in value, that's acceptable. If they do
that and they're only producing $300k more in value, and the other $200k
increase is coming from other people's productivity increases, then that's not
"fair" and shouldn't be acceptable.

So, which one is it? Does anyone have a compelling argument? In the financial
sector, for example, I think it's pretty easy to argue that it's the latter:
people who privatize gains and socialize losses are enriching themselves far
out of proportion to the value they create. When it comes to startups and new
businesses, it often works the other way, in that the person starting the
business, even if they become hugely wealthy, does so by creating even more
value than they capture. I'm not sure it's obvious if what's been going on for
the last 40 years is one way or another.

------
leot
There's an assumption here that being richer just lets you buy more stuff and
services.

Wealth, however, is power. While Bill Gates may be no more capable than me at
driving faster on the 101, I definitely can't pay a lobbying firm 10 million
dollars a year to make sure government policy serves my interests, or secretly
pay to have lies told in support of my cause by dozens of seemingly credible
people.

Some proportion of people are going to be unethical, and there are > 400
billionaires in the U.S.

The conveniently ignored problem with rising wealth inequality is the power
imbalances it creates, and the strong reinforcing feedback loops it enables.

[edited to fix typo]

------
Hyena
First, it doesn't control for increasing health costs. Employer-provided
health plans have seen large amounts of cost growth and this depresses wages,
for which they substitute. This is better than the raw story.

Second, much of the top quintile gains have come out of the financial sector.
You can see this in evidence by looking at the huge volatility in income
through boom/bust cycles. This is bad.

Third, we're in a lopsided labor period where lots of low-end labor is
available but labor capital production is actually quite low. This puts upward
pressure on the price of higher value labor capital but downward pressure on
raw labor capital. This won't continue as it's a byproduct of peculiar
historic issues (namely communism, etc.).

Fourth, the information technology revolution has so far failed, I suspect for
generational reasons. We've automated lots of low-end clerical jobs at large
firms but that's pretty much where IT stalled.

In technology companies themselves, this doesn't appear to be an issue and
technology seems to increase employment. It also tends to encourage additional
technical fluency, which is then rewarded. But outside of technology itself,
this pattern doesn't seem to hold. I suspect culture play a role here.

------
philiphodgen
I'm sorry, but there seems to be an omitted first step in the entire comment
thread of critiques -- from all comments coming from all political angles:
examining the underlying data.

The NYT graphic tells a terribly compelling story that supports a particular
political point of view. That tickles my bullshit sensor, and tells me it is
time to question the underlying data and assumptions.

Frankly, this graphic makes me hear the sound of ideological axes grinding.
That makes me want to question assumptions, data gathering, and data analysis.
This is all thanks to Prof. Eyrich and his Stats and Econometrics classes way
back when. (w00t Claremont McKenna College.)

I am not saying the graphic is wrong or it is right in the conclusions it
suggests. I just find it telling that the discussion thread jumps straight to
an Itchy and Scratchy Show level of discourse, without questioning the
underlying data.

Where is HN's passion for analytic rigor? Or does A/B testing and statistical
analysis apply to websites but not economics?

~~~
william42
It's kind of hard to A/B test an economy.

~~~
darrenkopp
We're pretty good at it now. A=Republicans, B=Democrats. We switch every
couple of election cycles and see how it goes.

~~~
marshray
It's interesting how the low point on the graph is 1976, but they put the
categorical divide at 1980.

------
bilbo0s
Is anyone able to explain this chart for me?

When they say that the 'Top Fifth' are all of the people in the labor force
making over USD112541, does that mean that 20% of American workers make more
than that?

That's pretty astounding to me, if it is indeed the case. At a labor force
size of about 154 million people, that means that over 30 million people are
making over USD112541. I know that a good number of people are making WELL
over USD112541 actually, though I thought it was just because of my
neighborhood and social group.

To see the aggregate numbers is staggering. Where is the money coming from to
pay that many people that much? I have some inkling that this is what leverage
and debt do for an economy, but ... wow.

Any econ profs, or grad students around to explain ho this is possible?

~~~
rayiner
These are household income quantiles, not personal income quantiles. It's not
stated on the chart, but that lines up better with:
[http://en.wikipedia.org/wiki/Household_income_in_the_United_...](http://en.wikipedia.org/wiki/Household_income_in_the_United_States)

~~~
pinko
Yes -- many families have shifted from single to dual-earner in order to
maintain the same standard of living, so the household income charts really
_understate_ the decline in individual wages over this period.

~~~
klbarry
That is not true. They vastly overstate the decline in wages, due to the rise
of more single person households. See:
[http://www.google.com/publicdata/explore?ds=a7jenngfc4um7_&#...</a><p>Individual
wages have risen steadily since 1910, with no gaps. The household income chart
is a misleading chart.

~~~
iaskwhy
Does this take into account inflation? It could be that they are actually
decreasing with inflation. I don't think it's like that but I'm just curious.

~~~
klbarry
Either way, it shows the growth as steady, since inflation has not been
particularly high in the last 20 years.

------
AlexC04
I don't know if I saw this on HackerNews or Reddit, but this one has a graph
that goes well with the link in the parent post.

 _Left behind in America: Who's to blame for the wealth divide?_

<http://www.cbsnews.com/8301-503544_162-20102289-503544.html>

~~~
cperciva
The 'what people want' on that page shows that people are confused between
_wealth_ and _income_ ; nothing more. The simple fact of saving money for
retirement creates more wealth concentration than that.

------
boredguy8
Funny, I was just in a discussion with some folks on this very issue, so enjoy
the citation bomb. In short: total compensation isn't outstripping
productivity by a substantial degree.

First, start with "The relative stickiness of wages and prices" by David E.
Spencer.
[http://findarticles.com/p/articles/mi_hb5814/is_n1_v36/ai_n2...](http://findarticles.com/p/articles/mi_hb5814/is_n1_v36/ai_n28704427/)
It provides important background to the discussion of whether wages or prices
'stick' more, and provides an overview of the debate through '98.

Next, we turn to Martin Feldstein's paper, "Did wages reflect growth in
productivity", 2008. <http://www.nber.org/papers/w13953> He highlights two
common errors with studies that find wages rose substantially slower than
productivity. First, he explains that such studies focus on wages rather than
total compensation. Without comparing productivity to total compensation, such
studies are dangerously flawed. Second, such studies tend to poorly select the
deflator when comparing productivity & compensation. Basically, the price
index that's used to determine compensation is different than the price index
used to calculate productivity.

For an even more recent discussion of the same problem, but within the context
of Russia's economy, read "Productivity and Cost of Labor: How Statistical
Illusions Are Born" by R. Kapeliushnikov, May '10
<http://mesharpe.metapress.com/index/BW00W218X2143504.pdf>. He explains:

    
    
      It seems that many of them are unaware of the difference between the 
      producer real wage and the consumer real wage. The former is estimated
      by deflating the nominal wage using the producer price index (PPI) or 
      the GDP deflator; the latter, by deflating the nominal wage using the
      consumer price index (CPI). One reflects the change in the price of 
      labor from the perspective of firms; the other, the change in the pur-
      chasing power of wages from the perspective of employees. Therefore, if 
      we want to answer the question of how expensive or cheap labor is for 
      firms, we should use the producer real wage, not the consumer real wage.
    

Hopefully this helps in evaluating the claims made by the EPI (the source of
the data used by the NYT). I'm not familiar with any direct responses to their
latest data, but Feldstein reaches a different conclusion over much of the
same time period: While there's some lag in total compensation, it's not
dramatically different than the rise in productivity.

~~~
illumin8
The attached graph clearly shows the difference between wages and total
compensation.

~~~
gwern
Yeah, it clearly says 'wages and overall compensation'.

------
radagaisus
I haven't seen it featured in a lot of US news agencies, but the economical
situation is Israel might be insightful in comparison with the US.

For the last couple of months Israelis are protesting about the economical
situation around the country. The focus of those protests is the neo
liberalist and capitalist direction the country took. You can search for #j14
on twitter. The protest demands among other things social justice, free
education from the age of 3 months and free housing.

Last week 400,000 protested around the country. That's about 7% of the
population.

Oh, and today S&P just upgraded Israel credit status to A+.

~~~
wanorris
You know A+ is way below the credit rating the US was downgraded to (AA+),
right?

------
victorbstan
So the working class has been taken to the slaughterhouse?

My billion dollar question: What happened at the end of the 70's / beginning
of the 80's?

~~~
dmm
End of the postwar boom? Following WWII the US dollar became the world's
reserve currency, this created a situation of constant demand for USD. The
raised the value of the US dollar and made resources cheap for the US. (It's
also allowed us to abuse the currency quite a bit. This will not last.)

Demographic changes which had been happening for years continued: in 1945 16%
of the total labor force worked in agriculture, by 1970 only 4% did (it's <2%
now). People were moving from rural areas to cities and getting jobs in
industry, changes which brought immediate changes to income and living
standards.

In the 70s and 80s huge amounts of industry moved out of the country, first to
Mexico and then to Asia, seeking cheaper labor. The rest of the world starting
catching up with us, they were moving from agriculture to industry too. This
made the more expensive labor of the US less competitive. The US economy
shifted to something we couldn't use Chinese labor for: building houses(and
weapons) for each other.

The postwar period was really an exceptional time. Lots of things happened
really. I don't think you can really attribute the changes that came at the of
the 70s to a single event or policy.

~~~
Andrew_Quentin
I do not think the graph applies solely to America or that the stagnation or
even fall of the share of gains only happened in US. I think much of the west
shares the same story, thus, reserve currency, unique place in the world after
the war etc explain the large gains in power, but not the effect of the graph
as if it were so there would be a different story for Europe which there
isn't. Therefore, it probably was the Thatcher Reagan policy changes.

~~~
dmm
> so there would be a different story for Europe which there isn't.

Or the US just dragged the rest of the world with it. The stagnation in the US
led to decreased investment and exports in Europe.

------
Spyro7
Since this is Hacker News, and there are a lot of really smart, numbers-
oriented people here, I just thought I'd provide a link to a dataset that
looks at income distributions within the US from 1913 to 2008:

<http://www.econ.berkeley.edu/~saez/>

Under "Income and Wealth Inequality" on that page, click the link titled
"(Longer updated version published in A.B. Atkinson and T. Piketty eds.,
Oxford University Press, 2007)".

It is an excel file that contains a metric ton of tables, charts, and figures.
If you have a few moments and want a deeper understanding of the issue, that
excel file is the best place to go.

(Edit: I just wanted to note one thing. My favorite graph from the excel file
is figure 1B, where you can see that we are basically returning to where we
were prior to World War II. It makes you wonder what was so different about
the post-war period that resulted in this shift. Personally, I wonder if the
sudden subsidization of education for returning veterans had anything to do
with it, but I have no data on this right now, so...)

As far as my own thoughts on the issue go, I agree with pg. For a boring,
academic take on it, there is a wonderfully dry 1980s paper by Rosen outlining
the superstar theory:

[http://www.ppge.ufrgs.br/giacomo/arquivos/ecop72/rosen-1981....](http://www.ppge.ufrgs.br/giacomo/arquivos/ecop72/rosen-1981.pdf)

Basically, thanks to technology and globalization the rewards to individuals
that have the highest levels of abilities have been magnified. Their "reach"
has increased relative to those below them, and their rewards have increased
in line with this.

While interest in this seems to be popping up all over the place due to the
current economic catastrophe in progress, the idea that communications
infrastructure improvements lead to income inequality is an old one.

Here is Alfred Marshall (founder of neoclassical economics) in 1890 (revision
from 1920):

[http://www.econlib.org/library/Marshall/marP54.html#VI.XII.4...](http://www.econlib.org/library/Marshall/marP54.html#VI.XII.42)

As for myself, I have no idea about whether this is a good thing or a bad
thing (or whether anything could/should be done about the growing inequality).
However, it is happening now, on a grand scale, so I think that it is
important for everyone to have some context on the issue.

------
mckoss
If you can invest capital to increase productivity, demand for labor goes
down, and wages will be kept down.

The only way to increase wages is then to proportionately increase demand for
goods and services so that, despite the productivity gains, there is an
increasing demand for labor.

We are also seeing automation (capital) and (cheap) overseas labor substituted
for domestic labor beginning in the 80s. Consumer demand did not keep pace, so
wages stagnated.

------
jeffdavis
When looking at quintiles through time, remember that you aren't tracking
people through time. That's because people move through the quintiles over
time (how much, I don't know, but the groups are not static).

In other words, it _could_ show simply a greater variance in income within
individual lifetimes rather than a greater variance in income between people.

For instance, if people spend more time at school, but their incomes a few
years after graduation are much higher, that would appear as a quintile
disparity because they spent years in the bottom quintile (college and just
after graduation), and then jumped into one of the top quintiles.

Similarly, as skills become more important, then (whether you go to college or
not), you'll spend more time at low pay before your skill level matures, and
then your income will rise rapidly.

Also, income is not wealth. Upper-middle class and rich people often spend a
lot of time in the bottom quintile (unless they are so rich that they have a
lot of passive income).

I'm not saying there isn't a problem. I don't have the data. But that
particular measure is quite deceptive in my opinion.

------
daniel_solano
The primary problem with this type of comparison is that it completely ignores
economic mobility. Someone simply isn't born into a given income bracket and
stays there for life. Most people's earning potential goes up over time.
Speaking for myself, I think I've been in all five quintiles.

~~~
DanielBMarkham
Your observation is a known flaw with this line of thinking. In fact, it's
such a powerful rejoinder I'm really surprised the NYT didn't address it.

If I remember correctly, movement among quintiles in the US is such that the
average person moves through many. Yes, there are the permanently wealthy, and
the permanently poor, but they are the exceptions rather than the rule. So
when people say "the rich get richer" what they really mean is that the income
segment defined by that qunintile, _over all_ , got richer. Individual people,
however, move around a lot, as anybody who has participated in the economy in
the last couple of decades can attest.

I know I'm not sourcing my statement. Apologies. I'm simply relying on several
rebuttals to this type of graph I've read over the years. Hopefully somebody
else will be able to provide some more substance and move the discussion
along.

EDIT: Random Google link: <http://www.urban.org/publications/306775.html>

_These studies of relative mobility have produced remarkably consistent
results, with regard to both the degree of mobility and the extent of changes
in mobility over time.[5] Mobility in the United States is substantial
according to this evidence. Large proportions of the population move into a
new income quintile, with estimates ranging from about 25 to 40 percent in a
single year. As one would expect, the mobility rate is even higher over longer
periods—about 45 percent over a 5-year period and about 60 percent over both
9-year and 17-year periods._

~~~
_delirium
Those statistics aren't actually _that_ encouraging, though they aren't bad
per se. If 60% move a quintile over 17 years, that means 40% stay put long-
term. And that isn't even a measurement of _large_ income mobility, like
jumping more than one quintile. Iirc from data elsewhere, the most common
quintile moves by far are churn between the 2nd/3rd/4th quintiles, with 2-or-
more-quintile jumps and movement in or out of the top and bottom quintiles
being less common than 2nd<->3rd or 3rd<->4th drifting.

~~~
DanielBMarkham
I'd like to see more data about this, as I find it interesting.

I don't know. I feel pretty assured, however, that if 40% move every year,
that the graph as drawn leaves out some very important details. As you noted,
the interesting question (from a political viewpoint) is how much mobility is
in and out of the top quintile as opposed to the bottom one.

And, reasoning a bit further, if people only move among the bottom three
quintiles, to them it's probably evidence that one day they might be in the
top quintile, whether or not that's actually likely. This might give them a
much more favorable view of lenient tax rates on the wealthy. Don't know.

And from a purely political standpoint, if people feel that they are moving
among the quintiles such that anybody has a chance at being in the top bunch,
does it matter what the actual data is? In other words, is there a perception
problem or are we trying to create one? Once again, I think you could argue
this either way from the data I've seen so far.

------
rgrieselhuber
What happened in the late 70s?

~~~
rayiner
Reagan (1981-1989).

~~~
bendotc
To be fair, Carter's reign wasn't exactly an economic wonder-time, and I don't
think Reagan was influencing the economy that much as governor.

I do think there's a political dimension to the change, but laying the blame
at Reagan's feet exclusively seems like simple political point-scoring.

Edit: it's funny seeing this comment getting down-modded. I think I'm
significantly more liberal than most people here, but it looks like people are
upset that I called out empty partisanship? I fail to see anything
particularly inflammatory about what I wrote.

~~~
rayiner
The article gives two ranges: 1947-1979, 1980-Present. Reagan's presidency
(1981-1989), and the political changes it brought, coincided with the
beginning of the second range.

~~~
bendotc
Right, again, I think there's a political dimension to this, but I don't think
Reagan created the problems two years before he got into office. My gut tells
me economic repercussions like this probably lag their causes by several
years, and looking at the graph, there's reason to think the problem started
even earlier in the seventies.

In short, saying Reagan had a big part in this is a claim I would support, but
saying it's all Reagan's fault is clearly untrue, barring time travel.

------
kevinpet
"debt exceeded income in 2001"

I read until I find a fundamental error like comparing two values with
different units. Only if it doesn't make any fundamental errors do I consider
whether it's valid or makes any subtle errors.

~~~
ianferrel
Aren't debt and income both denominated in $? What's the other unit?

~~~
kevinpet
One is in dollars, the other in dollars per time unit.

~~~
ianferrel
Ok, yes, that's true. But they're often compared directly. For countries,
Debt-to-GDP ratio is a common statistic used to indicate the health of that
country's economy/fiscal policy.

------
Gormo
Every time I see this kind of chart, I always wonder why the aggregate income
distribution of a population is a metric that anyone ought to be concerned
about.

What does one person's income have to do with anyone else's - why would you
aggregate everyone's separate incomes into a single figure in the first place?

And if someone's particular income is insufficient to meet their needs, how do
the aggregate population data help rectify that problem?

~~~
_delirium
I find the lack of increase in (inflation-adjusted) median wages to be the
more interesting headline, not the distribution of wages per se. In effect,
the average person has not seen any improvement in prosperity from the large
productivity improvements that technology has brought us. I think that's
problematic, in part because it makes it harder to argue that the tech
sector's growth will bring prosperity to the average person (rather than just
to us techies).

~~~
Gormo
Perhaps the earlier "jobs are obsolete" argument is right, and people aren't
reaping the benefits of technology as much as they might because the
productivity improvements that it creates inhere in an economic abstraction
layer that they're not participating in to the extent that they might.

If we imagined the way modern technologies might be applied to the productive
capacity of a family homestead, for example, the improvement that technology
brings to the homesteader's quality of life should be directly apparent,
without the need to rely on macro-level metrics at all.

------
yason
So, looking at the charts it seems that since productivity went up, more
people should be enjoying more spare time and less work. And to an extent,
this has indeed happened despite our resistance: it's just that in our society
we _call it unemployment_ and in fact punish people for it, both socially and
bureaucratically.

------
ry0ohki
My guess as to what happened in the late 70s... the microprocessor, and
computers becoming part of the workforce.

------
vishaldpatel
I have a simple theory, which is well.. simple: \- Most people look for paid
work when they need the money. This puts them in a position where they are
unable to negotiate a market wage. This adds tremendous downward pressure on
wages and keeps the middle-class down.

------
sparkycollier
The more relevant question in this global age is: what are the global stats?
How many people were lifted out of poverty during these "bad" decades on a
global scale? Country specific stats just don't mean as much as they used to.

------
johnnyg
How is productivity measured? GDP / (Hours Worked * Salary) = Productivity?

~~~
bendotc
It's a bit more complicated than that:
<http://en.wikipedia.org/wiki/Labor_productivity>

------
Florin_Andrei
It's hard to ignore the thought that the inflexion point and the beginning of
the Reagan era coincide. I try to push the thought away, but it keeps coming
back.

------
meric
Until 1975, labor was the most scarce resource. Post-1975, technology was the
most scarce resource.

A bridge needs a thousand people to build but the idea of a personal computer
only takes one genius to bring into fruition.

------
beefman
I assume "productivity" is something like real GDP/capita but it would be nice
if the graph had units.

The productivity/compensation line conveniently starts in 1947 and makes the
post-'70s era look unusual. In fact, the baby boom era was unusual -- with the
possible exception of the first industrial revolution in Britain (1700s), it
is without precedent in history. Two underlying factors are responsible: 1.
the destruction of all other industrial nations in WWII (and consequent
international demand for the dollar), and 2. cheap energy.

In 1947 the US had the world's only intact industrial infrastructure. This
created tremendous overseas demand for our goods and our currency. As
reconstruction abroad rapidly succeeded, the demand for the latter began to
outstrip demand for the former, and we were all too happy to supply
Eurodollars to meet it. By 1972, foreign claims on US gold reserves were
totally unsustainable and Nixon unilaterally ended the Bretton Woods
agreement.

Lightning struck twice on our shores with a sustained period of unbelievably
cheap petroleum, which also ended in the 1970s. Recent work in thermoeconomics
suggests that technology improvements are deflationary unless society can
increase its gross energy consumption. Today's ICs are thousands of times
faster than those of 1980, but they do not cost more. This is an efficiency
improvement - a deflationary effect. (This deflation is largely missed by
typical macroeconomic measures, which don't handle "hedonic" change well. The
classic demo is to let people spend inflation-adjusted dollars in a catalog
from 1980, and one from 2011. Nobody buys much from the older catalog.)

Building tract homes by the millions, on the other hand, requires increased
gross energy consumption and is therefore monetized and reflected in measures
like real GDP/capita. A similar issue exists around funding for "R&D". You can
only fund the R. Since 1980, there's been an outright explosion in the number
of scholarly publications disclosing promising breakthroughs, but
breakthroughs can't penetrate society without energy. They sit on the page.

Today, we are a people harboring postwar expectations in a world of global
competition and expensive energy. President Obama's recent speech was, like
many he's given before, a populist appeal for a protectionist return to
postwar conditions, when a high school diploma and a pulse could confer
property ownership. Such measures cannot succeed.*

One of the most important roles of government in industrial society is to
subsidize the production of energy. For the past 40 years, our government has
sat idle (or even enacted counterproductive policies) while the real cost
(EROI) of our energy sources has skyrocketed.

A common claim in connection with such graphs is that changes around 1980 are
due to tax policy. I personally favor progressive taxation (and models suggest
it can help with income inequality) but to suggest that tax policy is solely
responsible for changes seen since 1970 is ignorant at best. And such claims
are seldom accompanied by notice that all income quintiles (and all races)
have marginally higher real income today than at any time in the past (effects
of the great recession aside)... a moderately reassuring fact that would be
left out only by someone attempting to tell a story. Psychologists know that
income inequality has real, negative effects, so we should try to address it.
But we mustn't do anything that would disturb the modest Pareto growth we
have.

* Greenspun's comments on Obama's speech are also excellent: <http://blogs.law.harvard.edu/philg/2011/09/08/obamas-speech/>

------
shithead
"""

Another thing to consider in terms of whether the rich “deserve” their money,
or whether those rewards belong to the society that bestows them is the
consolidation of labor. Consider Oprah Winfrey. She s probably only marginally
better than the next best candidate for talk show queen. Yet she has amassed
100′s of millions while the next bes candidate for her job has no such job at
alll. So we have two people, one tha is maybe 5% better at being a talk show
queen, her income is 100 million, and another, 5% worse, and her income is
some middle class wage like 50,000. Because of consolidation, the society only
needs one Oprah Winfrey. We are paying 100 million to the role, not the woman.
That’s the key point. She herself is worth 50,000 plus 5%, and the role of
talk show queen, which could have been filled almost as well by many, many
other people, is worth all the rest of the money. That role belongs to
society, not to Oprahe Winfrey.

You see the same thing with CEOs, bankers, and others where consoliated and
mass production allows only a few highly productive roles. The wealth
associated with those roles, which is to say the consolidate dower, belongs to
society not to the individual lucky enough to get to fill the role. This is
why tax rates of 91% on the few that occupy the most consolidate roles was
thoroughly appropriate and part of an economic approach that led to America’s
greatest period of growth and general prosperity. High taxes on those who
wield societies greatest powers on behalf of society are normative. The power,
the influence they wield belongs to the society that allows and enables it,
not to the individual who fills the role.

"""

[ comment by 'Sharn cedar' on 'DEAR RICH FOLKS: Get Ready For A (Tax)
Revolution In Which Your Money Will Be Taken Away',
[http://www.businessinsider.com/tax-increases-are-
coming-2011...](http://www.businessinsider.com/tax-increases-are-
coming-2011-7) \- sic, a few typos uncorrected ]

~~~
solutionyogi
Wow. Obviously, if you are not Oprah, you would want to think that she is only
5% better than the next best candidate. I am sure others disagree. What if you
apply this to other fields e.g. Steve Jobs is only 5% better than next CEO?
Does it make sense? I think this is a nonsense approach to decide how to tax
someone.

~~~
shithead
Wow. An unfamiliar thought. Masterfully repealed, though. Not very logically,
but hey, so what. All is well.

------
michaelochurch
Short story of American inequality:

The economic growth since 1978 was, for the most part, produced by the efforts
of 10% of the population. It's true. I'm a leftist and I must admit that.
That's not to say that the other 90% aren't working hard and don't deserve to
share in the gains-- they obviously do-- but those gains are coming from a
small percentage of people. Many, many people work hard and deserve to have
good lives for their contributions, but only a small percentage (about 10%)
have the vision and creativity to push _increases_ in productivity; most are
adders, few are multipliers. (Many politicians are dividers, but that's
another story.)

The gains since 1978 have also gone to about 10% of the population. Maybe less
than 10%. Income gains are often offset by increased prices in the Unholy
Trinity (housing, healthcare, education costs). Quality-of-life is also going
down in most of the country, and where it is increasing, housing prices are
absurd even now. Even people whose incomes appear to be growing may be back-
sliding. 10% is generous, but let's go with that.

These 10%'s _are not the same people_. (Sorry Randists). There's an
intersection, but it's only about 2-3%, or 20-30% of each. The first set are
the creators of wealth; the second set are capturing it. Startup entrepreneurs
are in the first set (and if lucky, can enter the second). Well-connected rich
kids who get staffed in private equity firms at 24 and get to draw fees from
economic activity regardless of success or failure (because they'll get
promoted anyway) are in the second set.

Speaking as a member of first set, and merely on the outer fringe of the
second, I'll just say this: no, the economic inequality in the U.S. is _not_
desirable. Hard-line egalitarianism is ridiculous and impractical, but
inequality has gone too far. We know this. The only reason the absurdity is
tolerated is that 10-30% of the American population has insane social and
religious views that impel them toward degenerate politics.

Anyone who has traveled within Latin American societies _at all_ can see where
we're heading, and it's not pretty: massive economic inequality, desperate
rural poverty, and intractably corrupt, plutocratic governments.

I'll admit that what bothers me most about American equality is _what_ drives
the inequality. If it were reflective of differences in intelligence, the
correlation (slight, but positive) between intelligence and empathy would be
enough to impel this smart-and-rich elite to give back to the rest. At least,
I hope that is the case. But that's not what we have. Increasingly, the
inequality comes from inherited social connections (social capital, mostly
implicitly generational) and, as it increases, the decision-making elite
becomes more insular. That's what most elites become (generational social
networks, not meritocracies) and that is how societies rot.

~~~
lukesandberg
>The economic growth since 1978 was, for the most part, produced by the
efforts of 10% of the population

I don't see how that could be true. productivity gains have been experienced
across all levels of the income scale so surely that growth is attributable to
more than just the top 10%. Just because that's where the most income growth
has been doesn't mean that that is where the growth has been produced, its
just where it has been captured.

I think you are right in questioning what drives the inequality. I do believe
that some people are more productive and thus deserve additional income and
wealth. But i am not so sure that the amount of additional income that the
very wealthy earn is actually proportional to their intrinsic productivity.
The issue is that capital tends to create more capital because you can 'put it
to work' so the wealthy tend to become wealthier. So the rich will naturally
become richer because they have access to greater growth opportunities (though
investing for instance they can capture growth produced by other companies).

Capitalism fundamentally favors people with excess capital. This is what makes
it very effective and efficient because it encourages risk and investment.
however it doesn't necessarily produce a fair system because the owners of
capital have many means to capture and retain the returns of investment.

For example if in the proverbial pin factory innovations were made that
allowed workers to be more efficient (say by specializing different aspects of
the production of the pins) then all of a sudden the factory is more
productive relative to the labor invested. Now the question is who should
capture the gains of that productivity. Should it be the factory owner because
he/she put up the initial investment, the factory workers because they are now
more productive, the person who came up with the innovation? It's not really
clear but i think most people would agree that they all deserve some share of
the additional profits. The shift over the last 40 years has been that mostly
its going to the owner (the capital investor) and the innovator and not the
worker. It's tough to determine exactly how the profits should be divided
fairly, because fairness is so complicated in this instance. This is one of
the major benefits of labor unions because they provide a way for the workers
to share in the additional wealth that they are helping to create. Now
obviously not all occupations should have unions and not all unions are
effective, but this is the problem to which they are the solution, but you
have to admit that its a problem first.

~~~
babblefrog
I suspect that supply and demand have a lot to do with it. Capital and
innovation is scarcer than labor, especially unskilled or lower skilled labor.

~~~
Hyena
Diffusion, not innovation, drives economic growth. This is simple to
demonstrate by looking at the rate of catch-up growth. If there is a problem
with economic growth, it is more likely that there are too few diffusion
pathways than too little innovation.

Our patent system would tend to point in the direction of diffusion problems,
no?

------
mkramlich
One bite-sized takeaway: own a company, don't be an employee.

------
eurohacker
the top has had the biggest improvement compared to other groups during the
great depression in the 1930-s and during the current recession

thats an indictment of Fed which has probably intentionally caused all of the
crisis in the usa in the 20th century , to benefit Fed-s owners - few
commercial banks ..

