Getting Inequality Wrong

June 12, 2017
Posted by Jay Livingston

Imagine that you earn $125,00 a year; your spouse earns $75,000. Not so hard to imagine. I probably know a lot of couples in this range. A $200,000 income puts you in the top fifth of US households.

Who do you feel closer to socially and economically: the family whose income is $60,000 or the family bringing home $1.4 million? The $60,000 is  the average household incomes for those in the middle of the distribution. The $1.4 million is the average of the 1%.

If you thought you were closer to the average American, you’re kidding yourself. So says Richard Reeves in a New York Times article that, to judge from my Twitter and Facebook feeds, has been getting a lot of attention. Your perception, says Reeves, isn’t just misguided, it’s “dangerously self-serving.”

The rhetoric of “We are the 99 percent” has in fact been dangerously self-serving, allowing people with healthy six-figure incomes to convince themselves that they are somehow in the same economic boat as ordinary Americans, and that it is just the so-called super rich who are to blame for inequality.

From the end of World War II until about 1980 income inequality in the US had been narrowing. Since then, overall inequality has been increasing. In support of this idea that it’s the top fifth and not just the 1% whose incomes are responsible, Reeves looks at income changes since 1979.

the upper middle class is solidifying. This favored fifth at the top of the income distribution, with an average annual household income of $200,000, has been separating from the 80 percent below. Collectively, this top fifth has seen a $4 trillion-plus increase in pretax income since 1979, compared to just over $3 trillion for everyone else. Some of those gains went to the top 1 percent. But most went to the 19 percent just beneath them.


It’s not surprising that the 1% got less than half the increase, but they got a lot more than 1%. Their incomes grew far more rapidly than did incomes of the rest of the top fifth.

(Click on a graph for a larger view.)

The above graph comes from a Brookings publication co-written by the same Richard Reeves. The graph certainly makes it look as though the real separation is between the 1% and the rest of US households. Yes, the top fifth is getting richer – more so than the middle-income households. But the differences can still be shown on the same graph. By contrast, the line for the top 1% is so far away from the others that in order to show the increase of the 81st to 99th, Reeves has to remove the 1% from the graph.




Now we can see that yes, the incomes of the rest of the top fifth increased  - from about $120,000 to nearly $190,000. But the average income for the 1% went from about half a million to over $1,400,000. Here’s a graph of those percentage increases – 192% (i.e., nearly triple) for the 1%, 70% (less than double) for the rest of the top fifth.


It’s misleading to talk about “the upper fifth” as though those at the 85th percentile had a lot in common with the 1%, even within the 1%, the differences are striking. In a 2013 blog post (here), Dan Hirschman converted Piketty-Saez data to show increases for different sectors of the top 10%, Most of us would consider all of these folks to be rich, but some got more richer than others.

 


Here is a clearer breakdown of incomes in the top fifth in 2016.

(HT: Philp Cohen)

What’s happened since the 1980s, is that the top 0.01% have pulled away. They have become the super-rich. In 1970, if you were in the 1% pulling down $1 million a year, Mr. and Ms. .01% might have lived in a somewhat larger house down the street. Now, they’re so far away you need Google Earth to find their estate.

Reeves seems to be deliberately fudging over the real gaps in income (and wealth, which he mentions not at all). That’s too bad because his point about the upper-middle class is not about inequality – their economic distance from the middle. It’s about mobility. In their effort to ensure a better, or at least equal, economic future for their children, they are making class boundaries more rigid. In effect, they are building a wall – sometimes, as with gated communities, a literal wall – to keep their families in and others out. Fewer and fewer of those coming from less affluent families will be able to get in. 

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