Unequal income distribution in the United States

While driving the clogged freeways of California, I listened to an NPR show in which the central complaint was the inequality of income distribution in the United States.  Walter Benn Michaels bashes universities for being obsessed with admitting rich kids with Hispanic last names or dark skin, instead of kids from poor families.  Nobody raised what to me seemed like obvious questions, e.g.,

1) Should we stop accepting poor immigrants if we are worried about income distribution?  A Somali immigrant might end up achieving a higher standard of living here than in Somalia, but he or she is going to swell the ranks of below-average earners.

2) Are the people whom we consider poor today better or worse off, materially, than America’s poor were in the 1950s or 1970s?

3) Is it inevitable that as an economy gets more complex, those who are clever and talented will find ways to get rich that weren’t available in a simpler economy?  (And people who aren’t clever or talented won’t get any boost.)

Question 3 seems like the big one for me.  I was driving from a photographer’s house in Napa to an animator’s house in Oakland.  My host in Napa would have been lucky to earn a middling salary on a newspaper or magazine staff in the 1950s.  He is moderately rich today because our more sophisticated economy (1) allows him and his wife to finance and publish their own books, cutting publishers out of much of the profit, (2) allows him to market his decades of photography via the Internet to stock photo customers, and (3) allows him to do assignment work for magazines worldwide, the phone and the jet airliner making him just about as accessible to a European magazine as a European photographer.  My host/cousin in Oakland has a great talent for art and loves doing animation.  50 or 100 years ago, he would have been a commercial artist selling illustrations for $5-25 apiece.  Maybe if he had been lucky, he would have gotten what would then have been a low-paid job at Disney (as actors were not well paid under the studio system, animators did even worse).  Today there are dozens of employers of animators in the U.S., including Disney, Dreamworks, and Pixar.  Licensing deals with toy companies and cable networks, and new technologies such as the DVD make animated movies vastly more profitable than they were 50 years ago and enough of those profits have trickled down to the animators that they can afford to live very comfortably indeed.

The folks on NPR are complaining about how the rich are getting richer and we need to change government and institutional policies accordingly.  However, both of the folks I visited owe most of their wealth to changes in the economy and world markets that have nothing to do with government or university policies (nobody even cares if they have a college degree).

21 Comments

  1. Mike Scott

    December 26, 2006 @ 2:52 pm

    1

    I think you’ll find that both your friends owe the entirety of their income to government programmes and policies. Your first friend appears to depend on the Internet, which was of course developed by the US government. And both of them seem to rely on government enforcement of their copyrights.

  2. Grant

    December 26, 2006 @ 3:13 pm

    2

    Considering that only 10 percent of students at top universities come from the bottom half of the income scale, I’d say they have a point. (Source: http://www.hno.harvard.edu/gazette/daily/0402/28-finaid.html)

    Also, when you talk about income inequality in this country, one of the big topics is the estate tax and the efforts by some (including some of the wealthiest families in the US) to try to eliminate it. First of all, 99.5% of “estates” in this country are not large enough to be subject to the estate tax. Second, most of the wealth in an estate is in stocks and real estate, and due to how these properties are transferred to heirs, if you eliminate the estate tax you eliminate all taxes (thus allowing wealthy people to bypass capital gains taxes that “regular” people are subject to). An overview can be found here: http://en.wikipedia.org/wiki/Estate_tax_%28United_States%29

  3. JP

    December 26, 2006 @ 3:32 pm

    3

    Sure, “those who are clever and talented will find ways to get rich that weren’t available in a simpler economy.” But the difference between now and the not-too-distant past is that the tools needed to research, practice, and develop a skillset for any of the fields you mention are beyond the reach of the “working poor,” immigrant or not. At one time, apprenticeships, libraries, and legitimate high school trade classes might have given the ambitious, if resource-deprived, a bootstrap to tug on, but high-tech endeavors like photography and animation require equal parts hardware, software, and free time to make work. This may be why the West is falling behind in the sciences; it surely is the reason why the only “upwardly mobile” jobs for the lower class are in the service industry.

  4. philg

    December 26, 2006 @ 3:54 pm

    4

    Mike: You could also argue that none of these guys would be rich if they had been born in an African country without a stable government or the rule of law, so that the fair tax policy would be to take anything that any American earns over the $500/year that an African subsistence farmer earns…

  5. Russil Wvong

    December 26, 2006 @ 4:03 pm

    5

    “2) Are the people whom we consider poor today better or worse off, materially, than America’s poor were in the 1950s or 1970s?”

    From this graph, lowest-quintile family income doubled from $6000 to $12000 between 1950 and 1970; since then it’s stagnated between $12000 and $14000. (All figures in constant 2000 dollars.)

    “3) Is it inevitable that as an economy gets more complex, those who are clever and talented will find ways to get rich that weren’t available in a simpler economy? (And people who aren’t clever or talented won’t get any boost.)”

    I thought the biggest factor in rising inequality has been soaring inequality at the top, driven by CEO compensation (which you’ve complained about in the past, e.g. in your comments on Jack Welch).

    Some background information: Paul Krugman on inequality.

    Policies to compensate for rising pre-tax inequality aren’t difficult. Statistics Canada:

    One measure of income inequality is the ratio of income received by the 20% of families with the highest after-tax income compared with the 20% of families with the lowest after-tax income.

    In 2003, for market income, this ratio was about 12.9 to 1.0. That is, the 20% of families with the highest after-tax income received about $12.90 in market income for every $1.00 received by the 20% of families with the lowest after-tax income.

    However, taxes and transfers moderate the differences between the quintiles of the income distribution. After taxes and transfers, the one-fifth of families with the highest after-tax income received $5.50 for every $1.00 received by the one-fifth with the lowest.

  6. Ole Eichhorn

    December 26, 2006 @ 4:51 pm

    6

    Absolutely correct, income inequality is a symptom, not a problem. And it isn’t a symptom of something bad. The key is to have a society structured so that everyone can make the most of what they’ve been given. We have to recognize that life is a meritocracy, and we haven’t all been given the same abilities – intelligence, innovativeness, energy, and leadership skills are as unevenly divided as physical attributes like height and hair color (and have a lot more to do with earning potential).

    I think someone’s reaction to income inequality says a lot about where they fall on the political spectrum.

  7. hackticus

    December 26, 2006 @ 7:08 pm

    7

    Your little theory sounds great, until one considers that historically inequality has been much higher, not lower (the mid 20th century America is an anomaly), and in the present day inequality tends to be much higher in more primitive (simpler) countries. I recently saw a map of worldwide inequality and I believe the highest was in Africa.

    The two examples you cite sound charming but are nowhere near high enough on the income scale to be of interest.

  8. Colin Summers

    December 26, 2006 @ 7:47 pm

    8

    If only 0.5% of the estates in this country are not large enough to trigger the estate tax then I can’t see the upside of having one and enforcing it. We can’t possible be capturing enough revenue from the 0.5% (because, obviously, they are going to work hard to get around the tax).

    I see people like Warren Buffet doing better work with their estate than the US Government ever would, so I would prefer to leave as much of his money in his hands (and that of his chosen heirs) as possible. I would rather the Gates Foundation be using the dollars to solve childhood blindness in Africa than Bush and his cronies be using it to invade North Korea (stay tuned!).

    Your mileage may differ.

  9. Steve

    December 26, 2006 @ 9:17 pm

    9

    JP – I’m a software developer, and my company has a hard time finding competent Americans who want to make nearly $90K/year in a semi-rural area developing software. We don’t require a college degree, but we do expect candidates to be able to code. I argue that there has never before been a profession so accessible to almost anyone with smarts and determination. With a used computer for $100 and a $15/month DSL connection, I can learn enough to catapult myself into the upper middle class in a few years. Sure, the first job one might take might only pay $10/hour, but it’s not too hard to move up quickly when you’re competent. I can’t become a nurse without a college degree and the time/money that obtaining one requires. And, a lot of non-technical professions require the social skills obtained from an upper-middle class upbringing. What other profession offers such opportunity with such low barriers to entry?

  10. David R

    December 26, 2006 @ 9:18 pm

    10

    It is worthwhile to note that in discussions about “income distribution” a classic fallacy of equivocation can sometimes creep in. It is perfectly valid to discuss distribution (n) in the statistical sense – how people in one context have higher incomes than people in another. But be alert to those who would then shift to speaking of income distribution (v), subtly slipping in a premise that there is some centrally orchestrated process, like that found in a warehouse, that allocates incomes to people. And that since the results are “unequal” the process is “unfair” and thus government needs to intervene and correct the flaw. While it is true that in some totalitarian countries incomes are actually distributed, under a proper government, there isn’t any such thing as “income distribution.” With the exception of a tiny fraction received as gifts, all incomes are _earned.

  11. Mark D.

    December 28, 2006 @ 2:16 am

    11

    There is no earthly substitute for brains.
    No government intervention can reallocate them, either.
    One’s life begins when it begins. From then on it’s all about a person’s upbringing and environs and how he/she responds to them.
    A child born into a drug-dealing environment will more than likely gravitate towards that environment if he/she isn’t made to think/do otherwise.
    Similarly, a child born into a family of middle to high income parents would probably (odds are) gravitate toward an education and the trappings that getting an education and applying same can bring.
    The best we can do as a society is strive to give every person a chance to succeed. I think the USA does that pretty well.
    But again, there is no earthly substiture for brains.
    It is also not the government’s responsibility to provide everything for everyone (immigrants included) and ensure what many define as “fairness”.
    I laugh when I hear/read how the upper classes need to do more for the lower ones. Sorry, it simply doesn’t work that way. This isn’t heaven.
    Go read our world history. Past is indeed prologue.
    There is no substitute for brains. None.

  12. Alan Green

    December 28, 2006 @ 5:28 pm

    12

    I don’t quite understand the point of question #2. Do you mean that there’s no case for advancing the standard of living beyond where it was at some arbitrary point? If so, what is special about the 1950s or 1970s? Why not the 1500s?

    The answer to Question #3 comes down to your personal politics. Everyone has their own ideas on how worthy should be divided from the unworthy, and the relative sizes of those two groups. You’re happy if a few, exceptionally talented clever and lucky middle-class people can make the jump to earning a significant income. Me, I’d prefer if a larger proportion of the population had a larger share of the world’s wealth, even if the very richest few percent weren’t quite so rich. I even think that total production could be increased with less extreme distribution. (And, no, I’m not a communist, it’s just that from where you’re standing, everybody else is to your left.)

    Happy New Year!

  13. Joseph Shipman

    January 1, 2007 @ 2:06 am

    13

    The problem with the ‘statistic’ that incomes in constant dollars have stagnated for the lowest quintile is that it doesn’t take into account the tremendous increase in the overall quality of everything. Just like the ‘poverty level’ keeps being redefined upward (which is intended and politically motivated), the ‘standard basket of goods’ keeps getting better (which is an unintended consequence). So the life that someone in the lowest quintile actually lives today is a lot safer, easier, more entertaining, and tastier than in the 1970’s, holding relative position in society constant.

  14. Paomi

    January 1, 2007 @ 11:28 pm

    14

    Our evaluation and reaction to considerations of income distribution and individual well-being depends on a contextual framework whose elements and inter-relationships vary among individuals and various circumstances. Our personal value systems are a key part of this contextual framework. To what extent do we differ in how we value our own individual well-being vs. that of others? To what extent do we feel that one’s well-being (not just income) should be based on our genes, environment, education, personal contacts, etc.? To what extent do we have compassion for those less fortunate than ourselves with respect to any or all of those factors? In the early(ier) stages of evolution, it is a matter of the survival of the fittest. Ethics, compassion, fair-play, individual merit, social connections, etc. only count to the extent that they enable survival. At what point can we, do we, should we, evolve into a different paradigm? For example, in many primitive societies, individuals who became disabled or incapable of contributing were ostracized or killed. Members sharing the same genes got preference to those who did not. We still see this in the animal kingdom, where a crippled or diseased member of a group is ostracized or even killed. To what extent should our own well-being still be a matter of merit due to genes, environment, and luck? To what extent should we care for those less capable than us or expect others more capable than us to care? To what extent should we sacrifice some of our well-being, material gain, and income for the benefit of others? Why should children inherit wealth accumulated by others any more than society, as a whole should? Why should we deny others the opportunities that we have by the mere good fortune of being born with a more capable set of genes, or by being born into a more nurturing environment, etc.? To what extent should we value the well-being of all things besides our mere selves? In addition to the framework of how to value one’s personal well-being vs. the well-being of another, there is also the consideration of consequences of inequality, regardless of the merit of that inequality. Perhaps the greater the inequality and/or the less our compassion for others (regardless of “merit”), the greater the eventual instability of the embedding society, and the greater likelihood of aberrant behavior, including crime and fanaticism. Those sort of considerations seem to establish the foundation and framework for how we react to the issues and consequences of income distribution, as well as what we do with our own income. My point is that rather than just focusing on how we assess/evaluate income distribution and the causes of it, perhaps we should also identify the values and framework from which we are making those assessments and evaluations.

  15. philg

    January 4, 2007 @ 9:03 pm

    15

    Joe Shipman’s posting rings true for me. I grew up in what we considered an upper middle-class household. We had less than 2000 square feet of house for 5 people. We had one car, a 1970 dark green Chevy station wagon with black vinyl upholstery and no air conditioning. The car broke down frequently. Steak or chicken breasts would have been a once/week luxury food. We had a black and white TV and about five channels from which to choose. Many aspects of our life would be considered poverty line today.

  16. A.N. Mouse

    January 7, 2007 @ 12:49 am

    16

    The Heritage Foundation tried to readjust Census quintile household income figures here: http://www.heritage.org/Research/Labor/CDA99-07.cfm

    Now I generally don’t agree with THF but they have some good points – when computing inequality, you need to take into account taxes and redistribution, which bumps up the bottom quintiles. And you have to account for the the fact that the top household quintile tends to have many more people, including more earners. The top quintile also works many more hours (though this is a partly a surrogate for lower unemployment, rather than voluntary over-employment). Hence the inequality figures are smaller than they are usually portrayed. The bottom quintile earns half its ‘fair share’, and the top earns twice its fair share.

  17. Russil Wvong

    January 9, 2007 @ 8:25 pm

    17

    Joseph Shipman: “The problem with the ’statistic’ that incomes in constant dollars have stagnated for the lowest quintile is that it doesn’t take into account the tremendous increase in the overall quality of everything.”

    Actually, it does. The Consumer Price Index takes quality improvements into account. The Wall Street Journal, May 2005:

    To most people, when the price of a 27-inch television set remains $329.99 from one month to the next, the price hasn’t changed.

    But not to Tim LaFleur. He’s a commodity specialist for televisions at the Bureau of Labor Statistics, the government agency that assembles the Consumer Price Index. In this case, which landed on his desk last December, he decided the newer set had important improvements, including a better screen. After running the changes through a complex government computer model, he determined that the improvement in the screen was valued at more than $135. Factoring that in, he concluded the price of the TV had actually fallen 29 percent.

    … in the case of the 27-inch television where the price appeared to stay the same, Mr. LaFleur says it was obvious to him that the price had declined. The latest model had a flat screen, he says, something which consumers value more than the curved screen in the old model. The newer TV also had a 10-watt stereo, compared with the weaker six-watt stereo in the older model.

    Same thing for housing and for cars. The BLS used to do the same thing for computers, but they stopped in September 2003.

    philg: “Joe Shipman’s posting rings true for me. I grew up in what we considered an upper middle-class household.”

    For the upper middle class, life has definitely improved. Real income for the top quintile doubled from $40,000 to $80,000 from 1950 to 1970, and again from $80,000 to $160,000 from 1970 to 2000.

  18. Russil Wvong

    January 9, 2007 @ 8:27 pm

    18

    Oops, here’s the Wall Street Journal article.

  19. Wade Chandler

    January 13, 2007 @ 9:40 am

    19

    It would be nice if people quit mentioning Africa. He is talking about the USA. Get a clue. We all have the same opportunities. I live in TN. I grew up in a house with two bedrooms. It was so small we had a big heater in the middle of it to heat the entire house.

    You stepped out of the “tiny” bedrooms into a little hall, and there was the bathroom. You turned the corner the living room. You turn around in the living room the kitchen. You turn around in the kitchen the door. Two parents and three boys. The entire house would be around 600-800 square feet tops.

    I worked various jobs since I was boy. When I was too young to be on a pay roll I cut tobacco and picked vegetables on farms. When I was 15 I worked at Dollywood, 16-17 Subway and a local restaurant, 18 a bluejeans factory outlet, 19-20 a go-cart track while going to community college. I was run over by a go-cart and lost most of my left foot. I was laid up in the hospital for a month with 5+ surgeries. After that I was off my feet for a long time through physical therapy. I then had Melanoma and a surgery for that. I got lucky.

    The entire time I taught myself everything I could about computers. I write software in multiple computer languages including Java, C++, Visual Basic and Perl plus more. I took a job starting at 50,000 a year. Later I receive a raise, another, etc. The story continues, and I’m into different things. I’m now attempting to start my own business. I will be 30 in May 2007.

  20. GG

    June 22, 2007 @ 1:31 pm

    20

    Colin, the “upside” of collecting estate taxes on the wealthiest 0.5% of families is that it adds up to an enormous amount of tax revenue. The 400 wealthiest Americans alone are worth over a TRILLION dollars (see “The 400 Richest Americans” on Forbes.com). Wouldn’t it be a lot easier and worthwhile to enforce tax laws on the relatively few billionaires, than on the millions of people at the other end of the wealth spectrum?

  21. Jack Goldman

    October 12, 2007 @ 7:15 pm

    21

    America is better off financially and worse off spiritually in the past fifty years. There are more divorces, failed relationships, and stress due to being better off financially. The problem with wealth in America is currency debasement, government forced inflation of the fake paper money, makes rich people richer and poor people poorer. Three silver dimes bought a gallon of gasoline in 1964 and 2007. It takes six dollars to pay three dollars in taxes to buy one gallon of gasoline with fake paper money in 2007. Renters who are employees fall behind. Those who own homes, real estate, and have educations or are self employed get ahead. Rich people who had one million dollars in 1971 now have ten million dollars for doing nothing thanks to government created inflation or currency debasement.

    America is a much better place than fifty years ago. So is Europe. I can’t say the same for people in Iraq or Occupied Palestine. Winners love competition. Losers hate competition. I am happy for me but sad for those born in bad places where they suffer. Unequal income is the source of all racism, religious intolerance, war, corporate greed, and predjudice for national origin. People are greedy by nature and always want 40% more than what ever they get. I am happy with what I have. I had cancer and I survived where 90% of those with my cancer did not.

    Your health is your first million. We are all going to die. Are you doing what you came to this planet to do? People don’t want money. People want the feeling of being fully alive. If they can get that they are happy. This usually means high income buys inclusion and low income gets you excluded. It’s that simple. People want to be included and loved. People do not want to be excluded and hated.

    Make money. Be happy. Do what you came here to do and do it now. You can always make more money but you will never have more time.

    Jack Goldman

Log in