Growing income inequality: sign of the next Great Depression?

[Incredible Hulctuary]

I thought the rising tide of the invisible hand was supposed to raise all boats, not raise the boats of the top 10% and sink the rest.

http://www.boston.com/business/globe...idens_in_2005/

Income inequality grew significantly in 2005, with the top 1 percent of Americans -- those with incomes that year of more than $348,000 -- receiving their largest share of national income since 1928, analysis of newly released tax data shows.

The top 10 percent, roughly those earning more than $100,000, also reached a level of income share not seen since before the Depression.

While total reported income in the United States increased almost 9 percent in 2005, the most recent year for which such data is available, average incomes for those in the bottom 90 percent dipped slightly compared with the year before, dropping $172, or 0.6 percent.

The gains went largely to the top 1 percent, whose incomes rose to an average of more than $1.1 million each, an increase of more than $139,000, or about 14 percent.

[James Bowman]

Originally Posted by Incredible Hulctuary

I thought the rising tide of the invisible hand was supposed to raise all boats, not raise the boats of the top 10% and sink the rest.

http://www.boston.com/business/globe...idens_in_2005/

Well, you know the old saying, "why is it whenever we see the workings of the invisible hand, it always has its middle finger raised?"

However, you have to be careful about how you measure income inequality. I'll just cut and paste from the "income inequality" article at wikipedia.

(* * *)

Criticisms of Income Inequality Metrics

1. It is not clear how income should be defined. Should it include capital gains, imputed house rents from home ownership, and gifts? If these income sources or alleged income sources (in the case of "imputed rent") are ignored (as they often are), how might this bias the analysis? How should non-paid work (such as parental childcare or doing ones own cooking instead of hiring a chef for every meal) be handled? Wealth or consumption may be more appropriate measures in some situations. Broader metrics of human well-being might be useful.

2. Should the basic unit of measurement be households or individuals? The Gini value for households is always lower than for individuals because of income pooling and intra-family transfers. The metrics will be biased either upward or downward depending on which unit of measurement is used.

3. These income inequality metrics ignore life cycle effects. In most Western societies, an individual tends to start life with little or no income, gradually increase income till about age 50, after which incomes will decline, eventually becoming negative. This will have the effect of significantly overstating inequality. It has been estimated (by A.S. Blinder in The Decomposition of Inequality, MIT press) that 30% of measured income inequality is due to the inequality an individual experiences as they go through the various stages of life.

4. Should real or nominal income distributions be used? What effect will inflation have on absolute measures? Do some groups (eg., pensioners) feel the effect of inflation more than others?

5. How do we allocate the benefits of government spending? How does the existence of a social security safety net influence the definition of absolute measures of poverty. Do government programs support some income groups more than others?

6. Income inequality metrics are seldom used to quantify and examine the causes of income inequality. Some alleged causes include: life cycle effects (age), inherited characteristics (IQ, talent), willingness to take chances (risk aversion), the leisure/industriousness choice, inherited wealth, economic circumstances, education and training, discrimination, and market imperfections.

(* * *)

But in spite of that, a system where the rich get richer and the poor can barely keep up doesn't exactly do wonders for a country's long-term stability.

--JB

[General Apathy]

Most of our poor people have cable TV

[Incredible Hulctuary]

Originally Posted by BlueStreak

so how much did the top 1% or 10% increase. You don't give percentages for them. Is it much different than the increase in the market?

Did you read the last sentence of the quoted section?

[HangerAngler]

I wonder what the equilibrium income distribution would look like and how it compares to the actual right now.

[22aliens]

Here is another point of view. I do not completely agree, but they do make some good points IMO.

by Peter Schwartz (March 28, 2007)


The issue of income inequality reveals one of the ugliest aspects of today's culture. The ugliness stems not from the existence of income inequality--but from the motives of those who denounce it.
Income inequality used to be a rabble-rousing issue of the left. Now it is being raised by mainstream figures, from the head of the Federal Reserve to President Bush, who are apologetically trying to offer solutions. But what is the actual problem they wish to solve? Certainly, it is not a growth in poverty. To the contrary, between 1979 and 2006--the period during which income inequality has supposedly become more acute--real wages for the median worker rose 11.5%. Even workers in the lowest tenth percentile had an increase of 4%.
No, the alleged problem is not that some are becoming poor--but that others are too rich. The complaint is that while the bottom tier enjoyed a 4% rise in income, the top tier enjoyed a 34% increase. The complaint is that over the past 25 years, the share of income of the top fifth of households climbed from 42% to 50%, while that of the bottom fifth fell from 7% to 5%.
But this development represents an injustice only if we use a perverse standard of evaluation. It is unjust only if we measure someone's economic status not by what he has, but by what others have--i.e., only if he benefits not by making more money, but by making his neighbor have less.
This is the standard of egalitarianism--the standard that demands a uniformity of income, regardless of anyone's ability or effort. It is the standard of envy, whereby a problem exists whenever some have more, of anything, than others. And the egalitarian's solution is to eliminate all such inequalities.
Egalitarianism is the antithesis of the valid tenet of political equality, under which we have equal rights. That is, we have the right to achieve whatever our ambition and talents allow, with no one permitted to forcibly stop us. Egalitarianism, however, is a denial of the individual's right to be left free. It is an abhorrent demand that some people be punished for achieving what others haven't. It is a brazen declaration that an equality of condition must be attained.
And how is it to be attained? By--as the Australians aptly phrase it--cutting down the tall poppies. No one is to be allowed to surpass his fellow-citizen. No one is to be allowed to rise. Which means that the most able must be brought down to the level of the least able. The equal spread of misery and privation is the only "equality" that egalitarians ultimately seek. This is why they extol socialist societies, where all suffer equal destitution, while vilifying capitalist societies, where all are free to advance according to their abilities and where the poorest enjoy greater luxuries than any citizen in a "worker's paradise."
Making others fall does not make you rise. While prohibiting a Thomas Edison or a Bill Gates from becoming fabulously wealthy does indeed reduce income inequality, it does not make the poor richer. Nonetheless, it is what egalitarians desire. They are motivated by what Ayn Rand called "hatred of the good": if they lack something of value, they want to make sure nobody else has it either.
Income inequality is an effect. The cause is the difference in people's economic production. Criticizing income inequality is like complaining that a computer carries a higher price than a paper clip. Price reflects an object's market value--and the money someone earns reflects the market value of his work. There is no fixed, pre-existing glob of income that somehow oozes disproportionately into the pockets of the rich. Wealth is created. The top fifth of the population have ten times more income than the bottom fifth because they have produced ten times more.
In a statist system, people advance through government favors and at the expense of the genuinely deserving. But in a free, capitalist system, income inequality represents something good. It means that exceptional individuals are free to do their productive best, and to reap their rewards. Whenever a Bill Gates arises to make his fortune, the income disparity between top and bottom increases--but so does everyone's standard of living. If so, why shouldn't we welcome an inequality--including a widening inequality--in incomes? And, instead of apologizing for this phenomenon, why aren't our leaders denouncing the egalitarian enviers who want to level us all?
Copyright © 2007 Ayn Rand® Institute. All rights reserved.

[Incredible Hulctuary]

Originally Posted by James Bowman

Criticisms of Income Inequality Metrics

Those points are mostly moot if comparing inequality within the same society in different (but not too distant) years using the same measurements and methods.

Yes, the middle finger of the invisible hand is raised in a number of ways:

- Taxing hard-earned income more than passive income
- Corporate tax policies that encourage offshoring
- Corporate welfare
- Laws that tilt the market to favor big corporations over individuals and small companies (e.g. the overly permissive patent system which allows BigCorps to accumulate massive patent portfolios to use against the small players)

[James Bowman]

Originally Posted by Peter Schwartz

The top fifth of the population have ten times more income than the bottom fifth because they have produced ten times more.

This must come from the Objectivist Bureau of Rearology, where statistics are pulled from one hindquarters. (Fact: did you know that it's called the Bureau of Rearology, after Objectivist hero Hank Rearden?)

So this is the argument, I think:

1. Wealth is a sign of productive individuals.
2. Productive individuals become rich.
3. Therefore, all rich are productive individuals, who earned their cash by the sweat of their brow.

Or, restated

1. Egalitarians hate people having more than they do. (One can argue this one to death.)
2. Productivity is a sign of moral good.
3. Since the rich are productive (see above), then they are all morally good.
4. Therefore anyone would would one to curtail the income of a wealthy person, for whatever reason, is evil.
5. Therefore, anyone calling for some solution to the problem of income inequality is evil.

Interesting argument. Of course, I'm not going to tell you how I'm defining "interesting" in this case.

--JB

[The President]

I have mixed feelings about income inequality. I think it is OK as long as social mobility really does exist, and someone can work their way out of it. I think that is becoming more difficult with rising education costs and the need to have a higher education to break out of the lower ranks.

I do think that the rich are disproportionately benefitting from the way our society is currently structured and feel that even though they currently pay a big chunk of the countries tax bill - that could be pushes up a notch or two. There is a lot of noise in income inequality, especially as the baby boomers are nearing retirement, so it would be hard to argue that the full 14% increase they have seen is policy driven, but at least some of it very well could be. Our government is what has allowed them to become rich - paying a higher tax rate is just part of the territory that will preserve that policy.

[HangerAngler]

Originally Posted by The President

I have mixed feelings about income inequality. I think it is OK as long as social mobility really does exist, and someone can work their way out of it. I think that is becoming more difficult with rising education costs and the need to have a higher education to break out of the lower ranks.
I do think that the rich are disproportionately benefitting from the way our society is currently structured and feel that even though they currently pay a big chunk of the countries tax bill - that could be pushes up a notch or two. There is a lot of noise in income inequality, especially as the baby boomers are nearing retirement, so it would be hard to argue that the full 14% increase they have seen is policy driven, but at least some of it very well could be. Our government is what has allowed them to become rich - paying a higher tax rate is just part of the territory that will preserve that policy.

I don't think the word "need" means what you think it means.