Taking the position I am about to take on income inequality is like wearing a European brand coat made of endangered fur while driving a black Hummer with a NRA logo and a bumper sticker reading, “I love all living things. They taste really good” through the streets of San Francisco.  It’s just going to go bad.

I am going to try to convince the reader that outside of a few lucky individuals who were, in all probability, at the right time at the right place, that the cry of income inequality in our media and by politicos is misdirected.

In the hangover of the 2007 fiscal crash, over two presidential elections, Wall Street occupations, and a recent New York best seller from a French economist, Thomas Piketty, critiquing United States capitalism, there has been a constant and ever growing assertion of income inequality gone astray.  Like global warming, the gap is considered fact.  I am no economist, and not every economist is in agreement.  That said, the economists that DO espouse this are, I’ll admit, incredibly smart.

Krugman, a New York Times contributor and a Nobel Prize winner says, “The surge in inequality in the United States after 1973 completely reversed the movement toward equality…By the 1990s, America was probably about as unequal a society as it had been in the Great Gatsby era of the 1920s.”  This is from his book The Age of Diminished Expectations, one of over 10 books he has authored on the subject.  (Krugman, who makes $250K from the New York Times and another $400-500K from ABC, as well as an undisclosed amount from speeches and book royalties has a net worth over $3 million.   In perfect irony he is making a fortune warning us of income inequality.)

This recent chart from census data has been printed over and over again in newspapers and magazines. This particular graph is from a New York Times article on the subject during the 2012 election.

 

graph 1

 

Academics and data seem to agree.  Since 1979 the rich are getting richer, the poor are getting poorer, and the middle-income earners are simply going away.  Or at least that is what is implied.

Looking at this graph rigorously, what it is really saying is that  the poor aren’t getting poorer; they just aren’t moving as fast (16%) vs the top 1% (280%.)  In other words, the poor are not as upwardly mobile as the top percent.  This is assuming, of course, that the poor are the same group of people in 1979 as they are in 2007.  If the demographic continuously has households entering and leaving this group, then this graph has less authority.  But that’s not necessarily my point.

In 2011, the President said, “More fundamentally, this kind of gaping inequality gives lie to the promise at the very heart of America:  that this is the place where you can make it if you try.  We tell people that in this country, even if you’re born with nothing, hard work can get you into the middle class; and that your children will have the chance to do even better than you.”

Like the chart above, this confuses standard of living and upward mobility with income distribution.

Then, in the 2013 State of the Union, the President said, “It is our unfinished task to make sure that this government works on behalf of the many, and not just the few, that it encourages free enterprise, rewards individual initiative and opens the doors of opportunity to every child across this great nation of ours.”

This sounds good albeit it implies that something is broken. Is this really true?  Are the politicians, academics, and book signing economists right?  Are we in worse shape than a majority of the countries in Europe and Asia?  Are we, as Krugman asserts, in a pre-depression era society of slaughterhouse workers, street urchin newspaper boys, and post-industrial Rockefellers?  What is income inequality?  Does it really exist?

Starting with Occupy Wall Street’s mantra “we are the 99%!” I decided to look up what that means. What does our income distribution look like in the United States?  What is the top 1%?  What is the bottom fifth?

 

graph two

 

This chart based on U.S. Census shows what households make over a year.  The top 1% makes over $369,691 per year.  The top 5% makes $161,579 or over per year. The top 50% makes over $34,338 per year.  The bottom 5% makes (I couldn’t find the exact number) about $7,000 per year, and I don’t know what the middle fifth means, but you get the idea.

These are households, remember.  The top 5% seems reasonably obtainable to me for two wage earners holding bachelors degrees split evenly between genders at $80K each.  I went to the Bureau of Labor Statistics site and looked up average salaries for various jobs in the U.S.  A married couple with one spouse working as a high school drama teacher and the other as a dental hygienist with a few kids and a dog is in the top 10% of income earners at $135K.  A household with a single parent UAW worker with a high school degree employed at GM is in the top 35 percentile.  An orthodontist who fell in love, married his college sweetheart then studying anesthesiology and now lives in San Louis Obispo is well entrenched in the 1% category.

Interestingly, I think all of these people, the drama teacher, the UAW plant worker, and the orthodontist, would consider themselves middle-income earners or at least far from being the elite rich. I do think there is some relationship between their position on the wage earning curve and the amount of education they have received.  That is true.  The chart above also looks pretty smooth as well. The last two columns are higher because of the contrast of bin size with other columns to the left.   So where is the problem?

I’m not an economist.  My background is astrophysics and I didn’t do well in statistics.  In economics, they use the Gini coefficient to measure inequality of income.  The idea is that in a perfect world there should be a linear relationship between the number of people in the lowest to highest incomes and their respective income itself.  (I don’t see why this would be the case – this disregards talent (like Krugman), genius, the very lucky, the very unlucky, those who are definately not genius, drug addicts, and people who just don’t want to work.)  Then the Gini index is the area between the real data and the utopia line.  A Gini of zero is perfect.  A Gini of 1 means that one person has all the money and no one else has any.

 

graph 3

 

Our Gini index in the U.S. is .45.  Ok, not great.  Interestingly, this compares with China at .47, the UK at .456, and Canada at .44. In the last six months these numbers, albeit attributed to 2008, have been drastically recalculated with the UK, Canada, and Germany below .3 and the U.S. at .45.  Still, taxation has a huge effect on this number and post tax gini numbers. After tax, France, New Zealand, Italy, Canada, Australia, United Kingdom, and the U.S. all fall into between .3 and .4.

A few months ago, Senator Bernie Sanders said, “We have the most unequal distribution of wealth and income of any major country on earth, and we are worse today in the United Sates than at any time since 1928 before the Great Depression.”

If you compare our Gini index after taxes and transfers, our trend looks fairly close to the same slope or trend of other industrial countries we trade with.

 

G7_gini compared to other countries

 

I do not think Gini is a great indicator of quality of life.  Afghanistan has one of the best (lowest) Gini indexes in the world. But then so does Finland.  I’m sure there is an optimum value which rewards good behaviors and discourages bad ones while not aggregating too much wealth among too few.  A more interesting metric might be wealth concentration.  It would be extremely interesting to compare that to other countries over time.  What I have found is that for the last 100 years, wealth concentration has very positively been more distributed in the U.S.  (all charts are transferred from leading articles without citation.)

wealth share

So we shouldn’t look at Gini.  In fact, to show how qualitative it is, last year, the Census Bureau published a new set of statistics that feed into the Gini and that taken into account reduced our Gini index by 4%.   It is a sensitive calculation and all kinds of things can happen.  For example, a country with 5 households evenly distributed at 20,000, 30,000, 40,000, 50,000, and 60,000 dollars will have a Gini of .2.  A country with the same number of households with incomes at 9,000, 40,000, 48,000, 48,000 and 55,000 will have the same Gini.  Using Gini to rank different countries is very misleading.

Forgetting country comparisons, let’s look inward at the erosion of the middle class and upward mobility in the U.S.

Look at the chart below.  (It is from Income, Poverty, and Health Insurance Coverage in the United States: 2010, table A-2; Census Bureau, Dept of Commerce, U.S., September 2011 — I made the chart)  It compares the change in Gini index and the distribution of income in the U.S. from 1979 to 2010. The blue represents 1979 income and the red 2010 adjusted for inflation.

In the last three decades, there are less households below the poverty line and more households making over $100,000.  Isn’t that a good thing?

In other words, there are more Americans in the 1% category (i.e. the top 1% of income) than there were 30 years ago. There are also more in the 5% and more in the 10%.   There are less households in the middle $50-79KA category, but they didn’t shift left.  Those households shifted right to making more money.  As I said before,  I believe a person or household making $100,000 thinks of itself as middle class.  Where is the data that supports the middle class is going away?  How are we in worse shape now than in 1970’s?

 

graph 4

 

There are small gains for the poorest, but middle groups have migrated up to the higher levels.

What about poverty?  My only point so far is that we should be talking about real information instead of the populist dialogue we are having — using statistics to support a priori policy versus using statistics to shape policy.

The super-poverty is below the 50% poverty level.  While the poverty level has decreased from 1975 to 2011, the number of super-poverty as a percent of our total population has risen, according to the U.S. Bureau of the Census.  It has risen from 3.7% to 6.6%.  There are 20 million Americans in this group.  This should cause every American alarm.

Some researchers have argued that some of this rise is inevitable.  According the Wall St. Journal, since 1998, the U.S. population has increased by over 20 million.  Nearly half of that growth — 10 million people — has come from immigration, legal and illegal.  As in any country now and in the past, many immigrants make the drastic change of moving to a new country for economic reasons — to look for work.  In the case of illegal immigration this calling is acute enough to face life threatening danger in search of a job.  If that is true, this immigrant surge could account for a significant portion of the super-poverty.  Research as shown that hispanic poverty now accounts for 28% of the super poor, triple from the 10% in the early 70’s. This racial rise has actually decreased the contribution to the super poor of another race — Blacks — down to 24% from 30% before.

Researchers also point to the rise of divorce in low income households as a possible influence to the rise of super-poverty.  The number of female households with children in the U.S. has risen from 9% to 26% in 2011.  That’s a 3X increase.  Likewise female households with children in poverty have risen to 58% of all related children in poverty up from 25% ten years ago.

From my perspective, as I’m sure with others, super poverty is still an issue and it isn’t getting better.  For whatever reason it appears to be getting worse.  I do think it is difficult to correlate this increase of super poverty to any success or failure of the top 1% of wage earners.  We should put that aside and focus on the real problem.

What about the super rich?  We have seen the chart a million times a the beginning of this essay.  Is Krugman right?  Are the 1% of wage earners (those households making over $160K getting too much of what economic growth we are seeing?  The problem is that we talk about the 1% and lump a household making $160,000 with Bill Gates or Beyoncé.

Here’s the same chart but now I’m breaking that last 1% down.

 

graph 5

 

The first half of the 1% are fairly flat.  Most of the second half of the top 1% are now at WWII levels.  The biggest problem is in the 0.1% category.  They made a lot of money in the last few decades.  Of 72 million households 400 households made over $87 million in 2010.  This includes capital gains so it is possible much of this can be attributed to one time gains.

Obama said in 2011,   “Inequality also distorts our democracy.  It gives an outsized voice to the few who can afford high-priced lobbyists and unlimited campaign contributions, and runs the risk of selling out our democracy to the highest bidder.”

I don’t know if this is true.  Most if not all political leaders are categoric in their inability to be bought.  Is government for sale by high income earners?  The American Federation of State, County, and Municipal Employees is the second largest campaign donor in the U.S. for the last 20 years.  What about tax revenue?  Do the 1% pay their fair share?  In California the top 1 percent of income earners provided 40.9 percent of the state’s revenue from personal income taxes in 2010 and that was before a 30% tax increase on the same group.  

The bigger question is are we as a nation going to allow 400 people to make over $87 million (pretax) in any given year?  Is that fair to the rest of us?

I’ve already proven to myself that it is not impacting the middle class.  I cannot find any evidence of 1920’s like income inequality everyone is talking about.  The question is will we allow ourselves to be home to a few super talented or just plain lucky people who made it big?  Is that OK?

As an aside, I looked up the rate of charity giving.  Like the perfect Gini index it is a straight line.  It is about the same among all income earners poor and rich – about 5% of their total income.  Charity has grown over inflation by 4% in 2011 at almost $300 billion.

My point after looking at the data is this: we should all do a sit-in.  All 313,913,640 of us (this is 313,914,040 total population minus the embarrassed 400 super rich folks) should picket at the next Lady Gaga concert and shout,

“We are the 99.999%!!!”