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.
I have little problem with inequality. I do think there are some downsides, like the threat of violent revolution, but my point is that I'm not making some hobgoblin of wealth or income inequality. I don't really care whether 20% of U.S. wealth is controlled by the top 1% or the top 10%.
But it does strike me as a little troubling to see -4% gains for the bottom percentile over a period of 80% increased productivity (taking those stats at face value).
Now, of course, correlation does not mean causation and it's perhaps more interesting what the true underlying causes are. But if inequality is such a strong indicator, it is worth wondering whether inequality isn't a bad thing in itself.
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?
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.
Rich people have higher savings ratios than poor people. As a larger amount of income goes to those who have more than enough money than enough already, the average savings ratio increases. This is a drag on aggregate demand that hurts the economy.
Supply side economists will tell you that savings are not a problem because investment will go up. But then why would somebody invest when the people who would be interested in your product don't have the money to buy it because they're poor? This is pretty much the situation we're in right now, where there is no shortage of capital, but rather a shortage of possibilities for profitable investments because consumers have become more careful with their spending.
(I realize that it may look different from where you are standing - I am not an insider in the tech startup scene - but that is the picture in the larger economy.)
Another question that I am less certain about is how inequality affects economies of scale. Basically, as society becomes more equal, the larger size of the potential customer base makes investments in efficient production techniques more viable. Of course, there is the other side of the coin, which is that rich people finance advanced technology out of boredom, e.g. space travel.
This is simply not true - personal consumption is at an all time high. It is even higher now than it was before our recently ended recession.
[Edit: added graph of real expenditures, didn't notice my first graph was nominal.]
As is so often the case, it comes down to how you interpret it and put it into relation to other things going on in the economy.
So real consumption is slightly above the previous peak. Now if productivity has increased in the three years that consumption had this "U" shape, it means the same amount of consumption goods and services can now be produced using less labour. This means that even though GDP may have returned to its previous peak level, this level of GDP is now accompanied by higher unemployment - unless new jobs have been created by something else.
A typical candidate for such job creation would be investment. However, given that consumption has only barely increased over the previous peak, there is currently little need for companies to make investments to satisfy consumption demand.
So I admit to not looking up the latest numbers before making my post, then I would have rephrased my statement. What's clear is that consumption hasn't returned to the previous trend (and probably won't), and that's a problem for the recovery (especially compared to the recovery from the 2000 recession, for example, where consumption did not deviate from the trend as the graph you linked to shows).
Your parent comment claims that "consumers are spending less", then you provide data that refutes that (and I remember you've done that several times on other threads too). Does that further the discussion? No, nobody changes their mind. They just cherry pick other data that confirm their views, and question the neutrality of any data that doesn't.
I think most time people change their views on politics, it's by reading books, having life experience and thinking. Rarely by being convinced by someone on a forum.
(now I'll stop rambling cause there's an earthquake here)
You haven't been reading HN then, and you haven't met the Tea Party. There are a lot of people here who believe that poor people deserve their lot and should wallow in it.
In my opinion society needs to use tax dollars to ensure a basic standard of living for all citizens. This idea (the welfare state) is deeply unpopular in contemporary America.
You've turned a political disagreement about the methods to accomplish some desirable goal do so into a moral argument. You've decided that if I think there is a better way to elevate the poor than your way, I must want them to stay poor and thus must be evil.
Why do you feel you need to frame the argument as such?
There are SOME free market ideologues who believe that unrestrained corporations will enrich the poor, however I believe they are in the minority. You may be one of them.
The majority of libertarians believe that individual property rights are sacrosanct and that it is wrong to forcibly redistribute wealth to prevent poverty, hunger, suffering. This is the argument of the Tea Party to my knowledge. Am I wrong?
Right now the excess wealth is in the hands of the rich, especially the top one-tenth-of-one-percent (0.1%). Society is presented with a choice: (a) we can take it from them and redistribute it to the bottom 80%, or (b) we can let them keep it and allow people to suffer.
(a) is a moral statement, that the poverty of the poor trumps the property rights of the rich.
(b) is a moral statement, that the property rights of the rich trump the poverty of the poor.
Almost all proposed actions in this situation amount to either (a) or (b). The wealth of society can increase over time, but at any single point in time it is a fixed quantity whose distribution is intimately related to whether poor people exist or not.
Assuming one does believe (a), and also believes that our current level of redistribution is lower than X, it still does not follow that we need to redistribute from the rich. We could also redistribute from politically connected insiders (e.g., teachers unions, the military, real estate speculators) to the poor.
Your dichotomy of helping the poor also excludes a third possibility:
(c) Some of the poor are deserving of assistance, and some are undeserving. It is morally right to redistribute to the deserving poor, and morally wrong to redistribute to the undeserving.
(I tend to favor policies which automatically make the deserving/undeserving distinction. E.g., eliminate welfare/unemployment and replace them with unpleasant, low skill government jobs that pay welfare-like wages. Poor people willing to work get the benefits and those unwilling to work do not.)
There are ALWAYS more assumptions available to be challenged. Plenty in your post for instance. Turtles (assumptions) all the way down.
For instance, if the goal is to reduce poverty, you assume that it is mathematically possibly to take money from teachers. But if teachers are already on the brink of poverty, that won't work to reduce poverty. You're creating new poverty cases as you solve old ones.
Politically connected insiders are less relevant than those who actually have the majority of the money. It's not teachers, and it's not unions. It's software entrepreneurs, MBAs, and oligopolists. They have the far majority.
That's not an assumption, it's a simple fact.
Teacher wages are not even close to poverty, and they get lots of non-wage compensation which costs real money (not to mention they only work 9 months/year).
Politically connected insiders are less relevant than those who actually have the majority of the money.
On the contrary, the existence of politically connected insiders mooching off the system is evidence that we can provide more assistance to the poor without raising taxes.
That puts them well below the mark where they'd need to be to be to place in the top X% (10-30, depending on what study you use) that own 80% of American wealth. If you believe that shuffling around the remaining 20% will work, more power to you. But I'd have to disagree.
I will, however, agree that politically connected insiders mooching off the system is DEFINITELY an issue in the US. I would just point to Corporations and the Rich in place of Teachers on your list.
The fact that teachers may receive average pay for below average work does not put them at the "brink of poverty".
As for finding the insiders, follow the money. Teachers and old people are some of the biggest recipients of government money.
"we can let them keep it and allow people to suffer."
Using your feelings to guide your monetary policy decisions is no better than the creationists forcing ID to be taught in schools. If your hunch is that a Keynesian approach is ideal, cool. Many would agree. But choosing it because it's the obvious "moral" choice just dumbs down the whole debate, opens the door to all sorts of emotional reactionary ignorance, and doesn't get us any closer to the right answer.
Questions like "is better aggregate economic growth a justification for disproportionate tax increases for these people?" or "if the bottom percentile are hungry, should feeding them take precedence over growth objectives?" are inherently moral
If I may say so, that is a rather refreshingly humble statement for an economist to make.
Of course the government is not the only actor that can, or should, address moral problems.
As I understand libertarianism, they are not at all against solving issues of poverty or hunger. But they do believe that the government is not necessarily the best solution to every problem. Of course that statement should be obvious, as government tends to be less efficient and more watered down than other organizations. So the question is in the details.
When the government gives poor single moms peanut butter to make sure that her kids have protein to eat, that gets measured, and we can perform efficacy studies on it. When the government gives housing stipends to poor families so that they have a home to live in, we can measure that too.
If the enormous segment of the population that doesn't believe the government should be helping the poor is initiating some kind of private action that has broad, measurable effects on the plight of the poor, I would be delighted to hear about it. If not, then this claim that some other action should be taken kind of seems like a red herring in the discussion, because that means that the only practical options on the table are for the government to do something or for the government to not do something.
Today, helping the poor largely means lobbying for more spending for some program.
The reason that the government should provide this welfare service, however, is that it results in an incredibly desirable situation where any citizen of the United States would know that, no matter what the state of the (semi-)unregulated economy, it is guaranteed that they will be taken care of.
Were welfare left to the emergent logic of the market, somebody who, say, depends on medication to fight a chronic condition or somebody who cannot for some reason hold a job reliably (like my pan-handler friend who can't get a job because of his face tattoo and rotting teeth) would not be able to count on being able to survive should there be a severe economic depression or a war.
To live in a society where somebody who depends on an external institution to them to keep them alive cannot absolutely depend on that regardless of the economic climate is, in my opinion, uncivilized, and for such a person, downright hellish.
If you could convince me that the market is more reliable over time than the US government, then by all means, I might consider the dismantling of the welfare state a viable option.
I don't see it desirable to disconnect causes from consequences. Quite the opposite. Society functions best when people are very aware that their choices have consequences and when they choose to act in ways that produce good consequences. In fact, individual responsibility is essential to civilization. Society would just fall apart if more than a few percent of people began acting irresponsibly.
For example, America has a problem with education. There are a lot of children not learning despite a lot of money being spent. I think a root cause of the problem is students knowing that nothing bad will happen to them if they don't work hard in school. If all the unmotivated students would be put to work for a few weeks in picking crops, with the promise that this will be their lot in life if they don't learn, I suspect the education problem would solve itself quickly.
We live in a world where it is possible to be tremendously productive and wealthy. But it is still necessary to labor and be disciplined to achieve wealth.
Retirement, doing nothing productive knowing that you will still be able to eat tomorrow, should be the reward of years of diligent work, not the entitlement of the lazy who want to benefit from the toil of others without contributing.
Except this wouldn't work for the kids of rich parents who wouldn't have to worry about that actually being their lot in life. Also people can say "fuck that" & go to a life of crime. This also assumes that our agriculture sector would even want these legal workers who they'd have to provide at least minimum wage to.
While it might not be your view, the notion that the poor "deserve their lot" and even that their being poor is the Will of God (evangelical prosperity theology) is literally a mainstream conservative position.
If this doesn't ring a bell then you haven't actually been paying attention.
I have never met a conservative who believed that the poor "deserve their lot." And I can't think of one single conservative I know who wouldn't love to see the elimination of poverty. They just disagree with the liberal method.
If this were really the case why would conservatives donate money to charity? Why would conservative churches run food kitchens?
It's funny how people can skim through a 1200 page book and select just the parts they want to emphasize. I could go on, but I'm getting way off topic.
The second half I also disagree with, but it's just a failure of logic and a disconnect of values, not flat out idiotic.
However my impression was that the bulk of the Tea Party harbors a lot of hate for welfare recipients and social services in general.
They believe the poor should pull themselves up via bootstraps and should not receive direct help from the government.
Am I wrong about this?
As, perhaps, a kind of silly example, a couple of weeks ago, my car wasn't working, I was immobile. I didn't and don't believe that the government should've helped me get my car working. But I did believe that I should be helped. I called a couple of my friends and now my car is working again.
The problem is compounded by growing inequality of opportunity or decreasing social mobility (lower now than in many parts of supposedly "socialist" Europe, even!). Indeed, from my perspective -- as a European of East-Asian stock and traveling between the two regions -- the US looks more and more like a plutocracy, not unlike post-communist Russia, and not like a liberal democracy. The start-up system acts like a pressure valve in that system, but that just means there is pressure to begin with.
Which indicates another problem with high inequality: it seems to be self-reinforcing (ossification is the keyword here). You can see this on so many levels, starting with the fact that higher education in the US costs real money.
* which I'm too lazy to locate and properly cite here and now
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...
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?
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.
For example, in medieval times in Europe (and identically in sub-saharan africa), there was very low inequity.
The ruling class did not own anything except the shirts off their backs. Their jewels were "crown jewels" and couldn't be sold. They had control of the land, but usually couldn't sell it between themselves.
The few fungible valuables they had (salt, and other trade goods) barely elevated them above the common masses.
Today, the power of the ruling class is magnified a 1000 fold, but the working bottom 10% lives better than they ever have thanks to innovations in technology. Indeed, the bottom 10% lives even better than medieval kings despite living in a highly unequitable society.
If they didn't own anything then why do their ancestors still own great chunks of places like the UK - where many members of the upper classes can trace their ancestries, and the lands they own, back to the Norman conquest?
Life as a royal in medieval times was pretty tough, but largely because they were still expected to fight to maintain their position, compared to the lifestyles of most people in the countries they ruled they were well fed, well clothed and had much better accommodation than most.
Both land and other stores of value (eg gold & silver) were frequently traded between medieval landowners.
Even looking at Europe alone, the Kinghts Templers acted as bankers as early as 1000AD, which allowed the rich to transfer money over distance. By the 1300's the Medici's had created an institution that would be recognizable as a modern bank.
Yes, I would imagine so. At least, up until the point the rioting and looting starts, followed closely by the guillotines.
Another word for gross inequity is plutocracy.
a perceived threat to one's status activates similar brain networks to a threat to one's life. In the same way, a perceived increase in fairness activates the same reward circuitry as receiving a monetary reward.
One economic argument against inequality is that it results in people spending a lot of resources on guard labor. If I live in neighborhood with lots of inequality I have to spend lots of resources keeping the poor people from stealing my things. Therefore, reducing inequality via income distribution can create a public good in the form of less crime (and less resources wasted on protecting property). Thus, you can argue that redistributing income makes sense on the same grounds that having public police makes sense. That is an efficiency argument for reducing inequality.
I'm pretty sure that you're not measuring inequality in a reasonable fashion.
Larry Ellison has a lot more resources than I do, but the net worth ratio is far greater than the opportunities ratio.
Yes, he could afford his own space program, but we both can afford to go diving. He can't drive his (much more expensive) car on 101 any faster than I can. And so on.
I'm actually running into this problem. I'm trying to get someone to help with a project. One of the sticking points is that the potential reward, while "huge" by some measures, won't significantly change what he can do. Since your model predicts otherwise, it's clearly wrong.
How about you figure out how to measure the actual "problem" before proposing solutions?
HN people live in a bubble and seemingly have never met anyone who is in real poverty -- they think because in college they had to eat Ramen they were poor. They are clueless.
Real poverty is being illiterate, being malnourished in the womb, being raised in a crime-zone, growing up without dental care.
The increase in the "Real Poverty" is due to economic factors like giving all the jobs to China, dumbing down education, and civil rights/feminist revolutions which led to social destabilization and people falling through cracks.
Sweden and Norway and France and Holland are not having issues with "Real Poverty." And they all have big welfare states.
The welfare state concept is sound. It lifts segments of the population in Real Poverty out of poverty. The problem in the USA is that for every social program helping a family out of poverty, there are 10 programs putting them back in their place.
Yes, but the income inequality measures under discussion say the opposite, which is my point. (Do the arithmetic. $10k to $200k, which is way more than I make, is 20x. Larry is way more than 200x past me in wealth.)
1) He glosses together reduction of income inequality with elimination of it. The zero inequality thing has been tried and failed.
2) one of his arguments is that better education of the poor will increase wealth inequality, because it will increase the number of customers and the number of possible entrepreneurs.
While the premises are no doubt true, the conclusion isn't. There are other inequality-decreasing factors that might well have a stronger impact. At the very least, a better educated population might have the wherewithal to organize and vote for increased taxes on wealthy people. Less cynically, better educated people need less stuff to get by (e.g. their cars last longer), and they are savvier consumers. And empirically, if one excludes the U.S., the best educated countries tend to also have the lowest income inequality.
3) pg neglects the costs of U.S. monetary policy on risk taking. The past 20 years have seen low inflation. When inflation is low, there is less need for money to be invested in order to preserve wealth. With higher rates of inflation, investors have no choice but to try and extract greater value out of the wealth they have if they want to keep up.
4) A related point: pg's argument is that high taxes reduce the large rewards founders get, causing them to take smaller risks. Yet there is nothing intrinsic about taxation that necessitates the burden fall primarily on the recently wealthy. PG's argument doesn't easily apply to "old money" -- would the decrease in upside of a wealth tax outweigh the incentives to invest imposed by a wealth tax?
From a tech progress/startup perspective, wouldn't the elimination of capital gains in favor of a tax on wealth cause exactly the right kinds of incentives for starting companies?
That idea is dead on arrival in today's heavily lobbied climate, I'm afraid.
In France, the wealth tax is 0% under €800k, increasing to a maximum of 1.8% (once the person gets to ~€17 million). How could this lead to impoverishment when even relatively conservative asset management averages returns of >5%? Even in this case the party's wealth is still increasing (especially since the proposal is to offset the wealth tax by eliminating all capital gains taxes, which are already extremely difficult to calculate).
And it's hardly an abuse: property taxes (a kind of wealth tax) are already levied, and while many complain, few claim it is government overreach. Government policy that favors a small and already powerful minority would seem to be a much greater abuse.
The bigger question is: why do most governments tax people for creating value, instead of taxing people for failing to?
But the main article talks about 30 years where money has been taken from the poor and given to the rich - that is, everyone has not increased together, and the poorest have lost ground. This article doesn't really answer that.
Imagine that a group of people, a nomadic tribe perhaps, wanted the freedom to live in a non-hierarchical society. If someone imposed inequality--that the best hunter/gatherer in the group should receive a "fair" share of resources--that would be restricting the freedom of the people, would it not?
I'm not endorsing a particular solution here, and specifically not endorsing forcing factories to employ expensive people instead of cheap robots to 'create jobs'. But it's important to see the situation clearly.
And you still can, if you live like it's 1960. Cancel cable, Internet, and everyone's cell phones. Never fly. Don't buy organic food. No HDTV, iPod, iPad, or laptop. Have a modest wedding. Don't send your kids to college. Live in a one-story house with one bathroom and a small garage for your one car.
If people today have to work harder and smarter than their 1960s counterparts, it's because they choose to pursue a correspondingly higher quality of life.
Much of the "oil states" are like that.
> What about CPAs, lawyers, and their must be some sort of corporate hierarchy wherever these people are employed right?
(1) In other words, you don't actually know anything about these biz,so you're hoping that what you picked up watching "The Office" is reasonably close. It isn't.
(2) Not really. How many lawyers do you think an oil drilling company needs? They need more CPAs than lawyers, but a decent "roughneck" costs more and a decent foreman is gold, and gets it. The lawyers? Not so much.
It's hard and dangerous work, but it's very good money.
You folks really ought to look at what decent tradesmen get.
Those spoils paid high wages for the US middle class because it needed those workers for its factories and companies. After a few decades the advantages of the spoils of war evened out with other countries (catch ups in capital, education, strong legal systems) and technology for outsourcing and cheap shipping broke up the US middle classes prior monopoly on US factory/company jobs.
It was a selfless policy, perhaps unique in world history.
 http://www.bls.gov/webapps/legacy/cpsatab9.htm -- only stats on unincorporated single-owner businesses go back to the 1960s, but the stats on incorporated single-owner businesses don't show any significant change over the last 10 years, so it seems hard to argue that Americans are really more entrepreneurial now and those numbers just aren't catching it.
In countries like France, Germany and Australia, unemployment was constantly below 4% for many decades after WWII, even below 1% in many cases. What's more, rises in the unemployment rate due to recessions were quickly and successfully fought using fiscal policy. In fact, such policies where quite consciously implemented after WWII even in countries that did not see large scale destruction, because the consensus was that returning soldiers needed to be given employment to avoid social problems.
Unfortunately, low unemployment meant better bargaining positions for workers, and so getting rid of this "problem" was quite openly discussed for some time (this was documented in a PhD thesis, http://bilbo.economicoutlook.net/blog/?p=11941). Economic troubles in the 1970s helped convince people that something needed to change and made it easier for attitudes towards economic policy to be changed, i.e. the shock doctrine. Thatcher in the UK was probably the most memorable driver of this change with her very open fight against unions.
It seems to me that a nice test of which of the two explanations fits the bill better is to compare the development to countries in which those measures of inequality, unemployment, and decoupling of real wage from productivity increases did not change at the same time as in the US.
Was it because the large corporation developed differently, or was it because those political shifts happened at a different time?
God help me if any of my children want to become economists.
Thatcher's shock doctrine may have had many flaws of its own but the abandonment of targeting unemployment via monetary policy was preceded by the previous administrations' failures to actually achieve their unemployment objectives.
A few years ago, I had some contact contracting in a large corp., and it was quite a feat to adjust to the life 'inside', where to be quite honest, life was a good bit slower, with a largely out-of-sight board, and dictates coming from on-high.
The take-away for me, is that not everyone is a Paul Graham, or a Zed Shaw, or a fogus, and that if you support the overall welfare of the country, then we should also support the population at large with reasonable roles that can support them with a living wage.
If we don't do this, and we haven't been, then the consequences of a giant unruly, unhappy and active underclass await.
As one of the people whose opinion about working for a large company changed during the 1970s, I know I didn't consciously think about tax rates. (It's possible they affected me unconsciously though, via the examples of people who'd cleared more after tax due to lower rates.)
So if your parents had bought a lot of art, you could donate the art. Better yet you could donate a million dollars to a charitable foundation you had, have them use it to buy a piece of art from you, and then donate 4 other pieces of art which are now valued at $1 million each.
The result was a huge run-up in the value of things like art, and a simultaneous increase in public art for display. When you visit the Metropolitan Museum, you're basically seeing the benefits of a tax dodge.
Since taxable income is included in inequality statistics, but company cars are excluded, this caused a big spike in inequality in 1986.
As to the economic woes of the seventies, how much did they depend on policy, and how much did they depend on the oil crises? Anyway, I don't argue that everything was perfect before Reagan. I just argue that wages stopped being tied to productivity after him.
Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion."
Also: "Back when taxes were so high, the rich were really good at tax avoidance."
I have yet to see any time-series on tax avoidance or loopholes. If you do have some data on this claim, please give a reference; otherwise, you know...
Also, capital gains tax is really. You'd have to make less than $8,500/yr to be in a lower income tax bracket. This hasn't always been the case. So, one easy, legal way to pay less in taxes is to get paid via capital gains.
Before that, there was no point in being paid more. The only thing that made sense was to take pleasure in the organization that you ran.
Wrong period, but wasn't Jay Miner financed by some dentists when designing the Amiga, initially? This is the sort of thing I am thinking of.
Then there was a period in people largely borrowed against their house/assets to start a company. That is now closed to many.
On the flip-side (looking through pg's eyes), the cost of starting many classes of companies has now essentially dropped to just the time required, as much of the infrastructure, process, software required is free or can be generated or outsourced cheaply.
Or maybe why even today, other countries have reversed that tendency.
And the answer to that question is pretty simple, progressive taxation.
Large corporations tend to decrease economic inequality. "
I think this is off the mark. This time period corresponds directly to the rise of the financial industry which is mostly independent of firm size.
You can make the argument it's goosing the economy to concentrate more and more capital into a single point of failure, a deeply interconnected network of financial firms. And you gotta wonder what the economy would look like, if Wall Street hadn't been siphoning off so much of the brains and capital to play card tricks. It might otherwise have gone towards, say, innovations in healthcare, transportation, energy, even domestic manufacturing.
What "scale" are we talking about, and why ever would it be "firmly anchored at zero?" It's perfectly possible to have a negative net worth, a negative cash flow, a negative effect on the wealth and well-being of the society in which you live, etc.
What technology does "the top end" have access to that others don't today? Cell phones? Web servers? Technology has always been influential in proportion to its cheapness. And it's all really cheap now.
If a vacation works and recharges your batteries, it's not, in the grand scheme, a zero-productivity interval, is it?
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 are still around and arguably more powerful than ever. Yet the difference in pay between the top executives and average workers in those corporations is one way the growing gap between the rich and the not-rich is illustrated and measured.
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.
I think this says a lot more about how children's view of the world around them evolves as they grow up than about actual changes in the American business landscape. America has been the land of entrepreneur-worship for a long time. John D. Rockefeller was working for himself from the start.
Higher top rates in the 60's era also meant some of that productivity gain in wealth went back to the average worker. The whole economy gained wealth from public investment in infrastructure, funding for education, healthcare research and so on. But around the late 70's, the tide started to turn towards lower taxes at the top. A few more trends got rolling at the same time: technology that made big productivity gains possible; entire manufacturing industries being sent overseas; the financial industry getting really interested in ways to move existing wealth from where it was, to their own pockets.
That makes it sound entirely bad, which it wasn't... those trends also led to a slew of innovative new companies, disruptions to established business practices, stock options as a way to share in the risk and reward, and lots of cool gadgets. It's more interesting now than in 1960. But there are a lot of workers getting the shaft, and don't necessarily need to be.
Someone mentioned the technological advances, but technology did not start in the 70s. We had the invention of energy before then, TV, radio, aeroplane, car, etc. So, I think that the period where the employees started sharing less of the gains seems to coincide with the dismantling of the unions, which, on a common sense approach also it makes sense as loosing your bargaining power you would expect would mean getting a worse deal.
The technologists and the entrenched oligopolists ate all of the surplus while the commoditized worker drones got nothing. Which is inline with free market theory. The wealth goes to the people who produce the wealth and the people who corner the market.
This is so true, and I also think the fabric of our society will be strained as the gap grows. Especially when the offspring of these highly productive people begin inheriting enormous sums. Maybe a larger estate tax is a good counterbalance.
In absolute terms real income for the bottom quintile has increased. In addition, technological progress has drastically reduced the cost of many luxury items and put them in reach of the poor. Today the "poor" in America not only have clean drinking water and electricity they also have cell phones, internet access, large screen tvs, dvrs, cars, refrigerators, dish and clothes washers, etc. In short they have the ability to live at a much higher quality of living than in any previous era.
Sure it sucks to be poor, believe me I know, but let's not kid ourselves into thinking that the developed world is devolving into some dickensian nightmare when nothing of the sort is happening.
Edit: a helpful graph: http://en.wikipedia.org/wiki/File:United_States_Income_Distr...
No, you really don't know. Because being poor for you was temporary. I'm technically "poor" right now, but having a wonderful time because to make that amount of money I only have to work a few hours per week. Whereas some families at my daughters' school have both parents working two jobs to make less than I do. I've visited their home and no dishwasher, no clothes washers. They aren't working on a fucking startup.
let's not kid ourselves into thinking that the developed world is devolving into some dickensian nightmare when nothing of the sort is happening
My brother works in poor communities in the UK. It is happening. If trotting out graphs showing a single metric is all you need to do to convince yourself and voters like you otherwise, then I predict its only going to get worse.
That being said, I can't imagine raising kids on that wage.
The other quintiles, even the 21-40% group, have made real gains, and that's good, and most of your arguments apply to the other 4/5. However, it looks like we are slowly creating an underclass.
Do these people really have clean drinking water? Safe streets, homes and schools? Clean, healthy, food? A decent public education? I'm not talking about cheap toys, I mean basics of life.
Final rant: this stuff is personal for me. My family and I are a single income family, near the top of the 4th quintile now (< $120 K may not sound like much in Sunnyvale, but it goes a little ways in Sacramento), but I spent most of my childhood fairly poor. I was about 16 when Reagan's reign of error started ("Reagan" being a figurehead to represent the era and all its players). I went to college in the mid 80s, and watched the door to inexpensive public education largely being pulled shut bit by bit during the 80s. My academic abilities were in about the top 2 to 5 percent, but how is a poor, but smart, kid supposed to go to college now without piling on many thousands of debt? Are we doomed to live in a world run by legacy dullards like W???
In light of flat income growth, that means families either work more or do without. The scary thing (for me) is that we're reaching the maximum of the "work more" strategy when both parents work 1+ jobs. Where do people go from here, considering that they've reached the maximum of their family's earning potential while prices are still rising? I suspect that we're seeing the beginning of the real decline these past few years - with not only stagnant real income growth, but a decline in the amount of things we can afford, and that means less college education, a less educated work force, and rapidly accelerating (if it wasn't already) income inequality.
When you're priced out of a good education (can't afford one) that's when we cease to be a merit-based society where able people work their way up. That's the end of the American Dream in not so many words.
Your graph shows no growth in family income between 1970 and 2007.
But in 1970, Dad worked a shift and maybe Mom, while in 2007, to make the same money, Dad works two jobs and so does Mom.
That was rather the whole point of the original article, but you seem to have missed it. People may have the same amount of money, but a) they work every waking hour of the day and b) they have other costs that offset the income, such as health care. But they could have state-paid butlers washing their clothes and cooking their meals and it wouldn't offset the lower quality of life that comes from working multiple jobs, never seeing their kids, and being homeless the moment they get sick.
So levers for me, not for thee has precisely the result we would expect. Fascinating.
I'm not sure how large corporation has influence to this because at least, in Eastern Europe, raise of inequality (tycoons and such) goes hand in hand with lack of democratic institutions (sometime outright corruption but in many cases everything is "legal") and lack of regulations.
Unfortunately, regardless of reason of increasing inequality, history showed us that inequality is often fixed by events which are not part of capitalism teaching (revolution, war, crazy people end up leading the country).
Many of the arguments about economic inequality in this thread seem to be predicated on the notion that we are talking about comparing salaries or car brands. Don't be jealous of your neighbor for having a higher salary or a better car, and why should he have to give up more of his money via taxes just to enhance your lifestyle... seems to be the gist.
But income inequality is rooted in the question not of does your neighbor have more goodies, but how do we divide the spoils of our shared enterprise. If you and your neighbor are partners in the same firm, and you are working your ass off so that he can ride around in a Benz, things are a little different.
It is interesting to observe that when this argument is couched in terms immediately relevant to most of the posters here, the response on HN is quite different. I.e. "I have a great business idea, I just need someone to code it for 1% of the business equity". There are markedly fewer posters defending this notion, or condemning the hacker who wants a bigger share as exhibiting some kind of perverse socialist urge toward income redistribution, than there are posters in this thread defending the same notion expanded to society as a whole.
Technology can create entirely new ways of delivering value and generating income, it can multiply income and it can eat existing income streams.
Inequality is not such a bad thing if technology is the vehicle of economic mobility. Technology can act as a enabler in both directions of income generation.
However, when wealth or power or technology prevent economic mobility at any level, that is a bad thing. Inequality is not the problem, its access to economic mobility, which presumably means access to empowering technology.
We measure inequality of income not in absolute dollars but as ratios. So the anchoring at zero doesn't make a difference.
Is this view at odds with mainstream economists?
I believe the mainstream view is that technological progress is a tide that should naturally lift all boats.
If every programmer and engineer got paid $500,000/yr, that would be great...for ever programmer or engineer, it wouldn't matter much for others.
I do tech support for a web hosting company and I've definitely seen people with low incomes who don't and don't want to use technology, they are falling behind.
Moreover the bottom end of the scale isn't anchored at zero even in the US.
Oh! Are you "pg" of that ludicrous "hackers and painters" essay, the one that actual painters tore to shreds because it's the same sort of bizarre nonsequitor drivel? I can see you're still at it. Nice "work".
If you did a survey of developer compensations in Silicon Valley, do you think (a) developers who work in corporations with over 500 or (b) developers who work in companies with under 50 would have more egalitarian compensations?
My intuition suggests the former, in line with pg. I'd love to see actual evidence of this, though.
My disagreement with PG would come with whether that's the primary driver of inequality. For that, I'd argue it's the increasing power of generic capital over generic labor, instead of competition between specific types or quality of labor.
Large corporations decrease inequality?
Yes. All (most) software developers in a large corporation are paid the same wage. Well, there are persons that can make millions not working in a company (ie. Indie game developer, iphone app developer...). But when you work for a large corporation, you might take 20% more than the average developer, but not 20X times more.
So large corporations increase equality among developers. Boss get paid 10 times more than a dev. gets? Well, a boss is not a developer, and you are doing the wrong comparison here. Compare the boss in this corporation to another boss in another large corporation. They are getting paid in the same range, no? That's equality.
When you are your own boss, and your friends is his own boss; you can become as unequal as you want. So, small businesses and startups promotes inequalities.
Edit: I'd like to point out that this wasn't some kind of appeal to authority to support pg's arguments, so kindly explain the down mods.
...was that "reaganomics" took over after that.
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.
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.
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.
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.
You can't possibly be serious. Why aren't you already in Nebraska, then? There's plenty of land in the United States, most of it dirt cheap (being dirt). If you're not already from the country, you probably don't know why we all left the country. (Myself included.)
I could move to Nebraska but it is unlikely I could find a job that would afford me a residence.
This isn't about social norms, this is about whether the computer revolution has been worth it for the great majority of Americans.
A lot of Americans would kill right now for a job in steel or coal. And in 1960s America you didn't even need a high school diploma to own a house.
The only reason to put "owning land" on a pedestal is because you can grow food on it. There's no other reason to care about land ownership. But you don't want to be a caveman and actually grub in the dirt - no, you want to be an industrial worker, apparently. One without silicon technology - just steel and coal. Because that world was just fantastic.
Aspie computer nerd my ass. Punk.
The only reason to complain about the high cost of home ownership is if you think you must, must, must live right next to everybody else. Well, you can't. Not until you've gotten rich. But the rest of the planet is right here waiting for you to make it your own, and anybody who hangs out on this site should be more than capable of doing good deeds without hand-holding by all the cool kids.
In fact, if you want bricks and mortar in your cheap, cheap house, I heartily encourage you to adopt one of our antiques here in Richmond, Indiana. I'll help you pick one out and I'll even teach you how to mix mortar.
I don't post here about poverty for my own sake. Anyone here can handle themself.
I'm posting for all the people who are in trouble right now and facing homelessness because software engineers made their job obsolete and they have no money to re-educate, no job, and no government help. It's not right to just say these people deserve what they get and should find their own way out or die or become homeless. Our society is wealthy enough that no one should ever be without the basics.
Anyone who can afford $8000 is not in trouble. A huge portion of the population today cannot. (Also, most people don't have the tremendous unprecedented luxury of being able to make money online.)
1/2. Rent/land: Remain cheap in the midwest. Very nice 3 bedroom houses in suburban Texas can be had for $125,000; you can easily buy one on a software dev's salary (in other words, 1950s style where the husband as only worker). Insist on living on the West Coast? Well, you can blame the obscene housing prices on a combination of population increase and zoning laws.
3 food. Ok, we're looking at maybe 50% increase over raw inflation from the 1950s. Aside from this being a small increase, most of this increase can be attributed to additional food safety and even more importantly surging price in oil due to larger world population.
4. Education: Sure, it's surged, but again this is due to lower taxes and more social programs, not trade. Besides, education ($60k tuition for 4 years in public school) isn't that bad compared to the the savings on cars alone over a lifetime.
5. Has this gone up? Assuming your spouse was working in the 1960s that is.
6. In all fairness, life expectancy is significantly higher now than 50 years ago.
If you are good in English, you can teach it in some third-world country, while making some money in the side with the Internet. That will afford what you want.
Leave it to Hacker News to be overly literal.
Most people know what I mean. This isn't a legal document. The price of land drives the cost of housing.
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?
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.
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.
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.)
It's NOT that stuff though. That stuff is cheap.
It's rent, food, childcare, healthcare, and education. These are not luxuries. Cellphones cost nothing compared to these real costs, which can't be reduced by a "low impact" life.
Rent - accept 60s level housing and you can easily afford it, 1 bathroom each kid doesn't get his own bedroom etc..
Childcare - not applicable if you are living a 60s lifestyle you're wife won't work.
Education - Expensive b/c the govt subsidizes it.
Healthcare - problematic, but only b/c healthcare now is so much better than healthcare then.
This comparison also matters where you are. At least in the SF Bay Area, housing prices have doubled in real terms since the mid 1980s (for the same house!). You aren't getting better housing now.. just more expensive housing. (Note: Such price rises are not the case in areas w/ plenty of land, e.g. outside major coastal metro areas)
Survivorship bias. The average house has increased in size steadily, just as families have become smaller. People really did have a lot less room then. Houses that end up too small for current tastes tend to get expanded or torn down and replaced.
Cooking vegetables in a microwave is one of the best ways to keep nutrition locked in.
But you are also in the top 20%.
The bottom 80% are not as lucky as you. The bottom 80% cannot afford 2 cars, or a house, or cable, or an iPhone, etc.
Have some fucking perspective. You are doing well; but look around you. The rest of the country is NOT.
A tremendous part of the economy is out of work and cannot even afford to go to the doctor. You're living in a bubble.
My point is that the vast majority of Americans have more material wealth than their equivalents did 50 years ago. Everyone has more.,
Also Cable penetration is close to 60% in America, so at least half of the bottom 80% can afford it.
I've heard this argument quite a bit. I'm not convinced it's true. Is it the case that purchasing power for "non-core goods" has gone up, or that the cost of producing such goods has gone down? More likely the latter, IMO.
Look at the cost of home computers, for example. Most PCs cost a mere fraction of what they did back in the '80s and '90s. That has nothing to do with purchasing power increases, and everything to do with the decreasing cost of manufacturing PCs. Same thing with plasma TVs. Or with any new technology as it moves along the curve from state-of-the-art toward commoditization.
And why is this all that relevant, especially considering that purchasing power for core goods (which you don't mention) has probably declined?
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.
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]
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.
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?
So then tell us what's wrong with the data. I assume most people didn't question the data because income inequality since the eighties is rather well documented.
That you would call the data into question without providing any justification suggests you have some ideologies of your own.
What really surprised me is that both main trends are linear. I presumed both productivity and wages would be exponential. I can believe that the wages are inflation-adjusted, though I saw no mention of this (except in the quintile section), but that productivity would have the same base is unexpected.
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?
$1 trillion / 153 million workforce
= ~$6500 / worker
= $13,000 per household
It's not too hard to imagine that somehow this money tends to flow moreso towards people in the upper quintile (straight wage-earners would miss out, whereas the investing class has many avenues to receive it), so it wouldn't surprise me at all that 1 household could end up with their "share" plus that of 2 others, so:
$13,000 * 3 = $39,000 household income based on govt deficit spending
$112,541 - $39,000 = $73,500 household, /2 = 36,500 per person in "real", non-deficit enhanced earnings required to make the top quintile.
Made up entirely, but I don't think it is an unrealistic scenario at all. The enormous deficits we are now running can go a long way in hiding the truth for a very long time. Meanwhile, the debt grows and grows, and the interest on that debt gets larger every year. I just don't see how debt is inconsequential, but the vast majority of people seem to act as if it is (at least those who are even aware of it).
Individual wages have risen steadily since 1910, with no gaps. The household income chart is a misleading chart.
This is a log-scale graph, which is what you want in order to compare rates of increase. You can see sort of an inflection point around the early 80s, but I'm not sure if it's significant.
This is a sum of all incomes from all possible sources devided by population.
Incredibly stable since 1960.
And per capita is a simple average, while looking at medians or quintiles gives you a clearer picture. Per capita, a roomful of middle class workers all become billionaires if Bill Gates walks in.
Left behind in America: Who's to blame for the wealth divide?
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... 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.
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+.
My billion dollar question: What happened at the end of the 70's / beginning of the 80's?
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.
but also (to take some of your points) global competition would effect firms profit margin and theoretically depress income growth. but it does not necessarily explain why income growth shifted away from the middle classes. the issue is more about growth distribution than the presence of growth.
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.
he has a lot of stuff on his blog discussing tax policies and their effect on things like income growth.
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:
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):
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.
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.
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.
"Most people's earning potential goes up over time." This is generally true, but it goes up like compound interest. If you start high, it tends to get massively high by the time you retire. If you start in the middle range, the results are much less impressive. If you stay poor for very long after being done with school, your gains tend to be miniscule.
It's hard to move out of the bottom quintile when the bottom quintile is generally doing so poorly, though of course it's possible, in some cases, to still do so.
than some other countries around the world), but there will ALWAYS be some people who make more money than some other people living in the same country, and the main issue is to help each country and all the people living in each country gain prosperity over time, which has been the general worldwide trend.
To reply to a question in another comment below:
So the working class has been taken to the slaughterhouse?
No. Americans of all income levels still enjoy unparalleled prosperity compared to most people around the world, and the high rates of voluntary immigration into the United States even from countries that are themselves prosperous show that something about the overall mix of living conditions here isn't "slaughtering" people but rather meeting many people's aspirations on balance, in some way that makes moving far away from home an appealing idea.
Compare the US population pyramid in 1950: http://tfw.cachefly.net/snm/images/nm/pyramids/us-1950.png
To the US population pyramid in 2005:
Look at just how many more people are in the 40-55 demographic (peak earning years).
And the US seems to have lower mobility than other rich nations:
According to an article on NPR that was linked but then deleted here a minute ago, 80% of Americans think that one can still pull oneself up by their bootstraps. In the article, the subtext was that this mobility study proved that Americans were morons and don't realize how stuck they are.
What hogwash. If we think about what Americans and immigrants are actually seeing that makes them feel so hopeful, it's the opportunity of mobility through one's own efforts.
What opportunity of mobility does not imply is the greatest statistical father-son mobility. That would only be the case if each person born were randomly allotted IQ or EQ or whatever your favored intellectual attribute is for being more likely to succeed. But that's not how genetics work.
Not only that, but each person would have to be born into families with precisely the same quality of upbringing. But neither is that the case. In fact, on average, successful parents have successful habits that they pass on to their children.
The upshot is, the method of this study is absurd. The correlation between your dad's income and your income does not represent freedom of mobility, it's just a lot easier to measure.
One can easily imagine societies arranged with more arbitrary success paths that lead to greater father-son mobility than a meritocratic society organized by families of natural born children.
No money needs to be involved for the preceding to be case.
Now, I actually favor an even greater level of meritocracy. I would be interested in something like a 90% death tax, to be put in a pool and distributed proportionally to children upon a certain birthday. I can see all sorts of problems with the naive version of that idea, but something in that spirit would be fantastic. Let's get rid of family money dynasties.
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. 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.
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.
The relevant question is around mobility between quintiles. Put another way: how likely is a person to retire in a higher quintile than the one in which he/she was born? The data pretty conclusively show that the US is calcifying in this regard. In other words, it's more difficult to move up to a higher bracket now than it was 30 years ago, etc. I don't have a citation handy, but I believe Elizabeth Warren has done some research into this area (as have others).
First of all, I would disagree that social mobility is increasing. Rich kids are doing better than ever.
Secondly, I believe history indicates that hereditary aristocracies are actually less brutal and dangerous than "merit"-based ones. It is the revolutionary forces that destroy societies and kill tremendous amounts of people. People born into poverty who work their way to the top through a sociopathic drive for power and look down on everyone else with a blame-the-victim mentality.
These people are dangerous. And Hacker News is full of them.
I believe during the boom years of industrializaton, THE scarce resource was manpower. Factories were full of machines, and machines were operated by humans. In 1943 U.S. Steel employed 340,000 workers.
The high demand for manpower allowed workers to capture a greater proportion of the economic surplus their activities generated through negotiation.
At some point other ingredients of business became crucial and thus the balance of power shifted.
We've been eating our seed corn ever since.
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.
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.
It's silly for presidents to talk about the economy at all. It's just another way for politicians to take credit for something they aren't responsible for. Do you think Jobs and Woz started Apple because of Carter's economic policy? Do you think Microsoft succeeded because of Reagan?
Of course some companies rise and fall along with the political tides. I suspect that a close examination of these will show you bribes and favoritism. Companies that depend on a favorible political climate probably aren't adding to the economy at all.
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.