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Extreme income inequality

August 30th, 2010 · 3 Comments

ZeroHedge remains an interesting site, despite their senseless and almost completely unsubstantiated daily rants against Keynesianism (or better, what they think is Keynesianism). This is a must read on the extraordinary levels of income inequalities in the US. We will, as promised earlier provide a theory of why this is one of the reasons of the crisis later..

Presenting The Findings Of The Working Group On Extreme American Inequality

Submitted by Tyler Durden on 08/29/2010 16:26 -0500

America has long had a working group on financial markets (whose sole purpose some suggest is to keep stocks from plunging in times of turbulence), so why not have a working group on that other much more critical phenomenon of US society: a trend of unprecedented unequal wealth distribution, which can be summarized as simply as pointing out that 1% of US society holds more wealth (or 33.8% of total), than 90% of the remaining portion of America (26.0%), and also is in possession of more than half of all stocks, bonds and mutual fund holdings in the US. Well, there is, even if is not formally recognized, and made up of the same distinguished professionals as the PPT (Geithner, Bernanke, Gensler and Schapiro). Hereby we present some of the key findings of the Working Group on Extreme Inequality.

  • Percentage of U.S. total income in 1976 that went to the top 1% of American households: 8.9.
    • Percentage in 2007: 23.5.
  • Only other year since 1913 that the top 1 percent’s share was that high: 1928.
  • Combined net worth of the Forbes 400 wealthiest Americans in 2007: $1.5 trillion.
  • Combined net worth of the poorest 50% of American households: $1.6 trillion.
  • U.S. minimum wage, per hour: $7.25.
  • Hourly pay of Chesapeake Energy CEO Aubrey McClendon, for an 80-hour week: $27,034.74.
  • Average hourly wage in 1972, adjusted for inflation: $20.06
    • In 2008: $18.52.

A look at income data:

Median household income in 2008 was $50,303, according to Census data. Half of American households had income greater than this figure, half had less.

Between the end of World War II and the late 1970s, incomes in the United States were becoming more equal. In other words, incomes at the bottom were rising faster than those at the top. Since the late 1970s, this trend has reversed.

For example, data from tax returns show that the top 1% of households received 8.9% of all pre-tax income in 1976. In 2007, the top 1% share had more than doubled to 23.5%.

There is reason to suspect that this level of income inequality is dangerous to our economy. The only other year since 1913 that the wealthy claimed such a large share of national income was 1928, when the top 1% share was 23.9%. The following year, the stock market crashed, which led to the Great Depression. After peaking again in 2007, the U.S. stock market crashed in 2008, leading to what some are now calling the “Great Recession.”

Between 1979 and 2008, the top 5% of American families saw their real incomes increase 73%, according to Census data. Over the same period, the lowest-income fifth saw a decrease in real income of 4.1%.

In 1980, the average income of the top 5% of families was 10.9 times as large as the average income of the bottom 20 percent, according to Census data. In 2008, the ratio was 20.6 times.

The current recession has hit incomes hard across the board. Median household income declined 3.6% in 2008, the largest single-year decline on record. Adjusting for inflation, incomes reached their lowest point since 1997. (Center on Budget and Policy Priorities analysis of Census data).

Wealth Facts

Wealth is equivalent to “net worth,” which is equal to your assets minus your liabilities.

Examples of assets include checking and savings accounts, vehicles, a home that you own, mutual funds, stocks and bonds, real estate, and retirement accounts.

Examples of liabilities include a car loan, credit card balance, student loan, personal loan, mortgage, and other bills you still need to pay.

Median net worth in 2007, the latest year for which figures are available, was $120,300. Half of American households had net worth greater than this figure, half had less.

Net worth is even more unequal than income in the United States.

In 2007, the latest year for which figures are available from the Federal Reserve Board, the richest 1% of U.S. households owned 33.8% of the nation’s private wealth. That’s more than the combined wealth of the bottom 90 percent.

The top 1% also own 50.9% of all stocks, bonds, and mutual fund assets.

Retirement accounts like 401(k)s are more equally distributed. The top 1% owns only 14.5% of all retirement account assets, while the bottom 90% owns 40.5%.

The total inflation-adjusted net worth of the Forbes 400 rose from $502 billion in 1995 to $1.6 trillion in 2007 before dropping back to $1.3 trillion in 2009.

Net Worth is highly unequal when it comes to race. In 2004, the latest year for which Federal Reserve figures are available, the typical white household had a net worth about seven times as large as the typical African American or Hispanic household.

Since the 1980s, Americans have spent more and more of their income on expenses, leaving less for savings. The U.S. Personal Savings Rate declined from 10.9 percent in 1982 to 1.4 percent in 2005 before rising to 2.7 percent by 2008.

Facts on CEO Pay:

From 2006 through 2008, the top five executives at the 20 banks that have accepted the most federal bailout dollars since the meltdown averaged $32 million each in personal compensation. One hundred average U.S. workers would have to work over 1,000 years to make as much as these 100 executives made in three years. (Institute for Policy Studies, Executive Excess 2009)

Since January 1, 2008, the top 20 financial industry recipients of bailout aid have together laid off more than 160,000 employees. In 2008, the 20 CEOs at these firms each averaged $13.8 million, for a collective total of over a quarter-billion dollars in compensation. (Institute for Policy Studies, Executive Excess 2009)

These Top 20 Financial Bailout CEOs averaged 85 times more pay than the regulators who direct the Securities and Exchange Commission and the Federal Deposit Insurance Corporation. These two agencies, many analysts agree, have largely lacked the experienced and committed staff they need to protect average Americans from financial industry recklessness. (Institute for Policy Studies, Executive Excess 2009)

And lastly, wage facts:

Between 1972 and 1993, the average hourly wage dropped from $20.06 to $16.82 in 2008 dollars. Since 1993, the average hourly wage has regained only a part of the ground lost, rising to $18.52. Adjusted for inflation, the average wage in 2008 was still lower than it was in 1979.

So now that we know that the US middle class is making less than it did in 1970 in real terms, that the uber-rich control the majority of America’s wealth, and control more net income that 90% of society, the rich are getting richer, the poor are getting poorer (and in general all of society is starting to read like a skewed non-Gaussian distribution curve comparable to something one would find in a Taleb novel), it is more than clear that the US middle class is now on the endangered species list. And while the slow by sure decline of that social buffer that has kept the civil peace within American society for so many years is a fact, it is no surprise that pundits like Jim O’Neill is suggesting to forget the historical driver of 70% of US GDP (and 30% of the world’s), and focus on those up and coming societies whose middle class still has at least a fighting chance.

Full working group presentation

Tags: Credit Crisis · Economy

3 responses so far ↓

  • 1 persistentone // Aug 30, 2010 at 8:19 pm

    One big reason for increasing disparity since 1976 is that the manufacturing base of the company has collapsed, taking with it high paying blue collar jobs. Also, many white collar jobs have been shipped overseas (e.g., call centers to India). These are long term structural problems. The solution to these problems is not to punish people who make $250K / year.

    The disparity you highlight would be better addressed by a low asset tax on people who have assets over $5M. If the ultra-rich have too many of the assets, target the ultra-rich. The problem I have with articles like yours is that you demonize the super-wealthy, but then the actual policies that emerge punish the upper middle class. A small business owner that makes $300K per year loses half of that to tax, and if that business has good and bad years, the person most likely hangs onto much of that money to make sure the business can stay alive in bad years. This person is close to the top 2%, yet they don’t enjoy any of this income at all.

    If you are going to demonize the super rich, then target the super rich. Don’t use that as an excuse to tax to death small business owners who rarely get to enjoy their higher incomes.

  • 2 admin // Aug 31, 2010 at 7:24 am

    Well, we’re not demonizing anyone here, hopefully. However, we do thing rising inequality is an under-appreciated cause of the financial crisis and it is behind many social ills:
    http://shareholdersunite.com/2010/02/27/inequality-social-ills/

  • 3 persistentone // Aug 31, 2010 at 11:57 pm

    I’m not arguing with the general thesis that large income disparity is a problem.

    I am arguing that such articles focus on people with super high net worth > $10M and then the actual corrective policy doesn’t target those people. Instead the corrective policy is to go after the upper middle class (>$250K AGI).

    The best way to target the rich is a small asset tax. Don’t punish the small business owners who are the major drivers of employment.