January 02, 2008

If You Get a Smaller Slice of a Bigger Pie, Are You Still Getting Hosed?

AS ONE OF ABOUT THREE Americans who find economic data really interesting, I have to point Loyal Rant Readers to some spectacular work which blogger Afferent Input has done regarding U.S. income inequality. Our anonymous blogger has created some really clever charts which show income inequality trends from 1979 to the present.

Those readers who keep an eye on these things -- and who have read my various posts over the years on these issues -- won't be surprised to find out income inequality has risen over the past three decades. America's Gini coefficient is up somewhere around 0.46 or so, up from 0.40 in 1980, and that alone gives you the gist of how things are going. Still, the charts Afferent Input has produced show pretty clearly the top one pc of American households are holding an ever greater share of the nation's wealth.

Along those lines, the top 10 pc overall have increased their shares of the pie, while everyone else holds correspondingly less. The poor and working class have seen their share fall some 30 pc over that time, while the lower-middle class and middle-class have seen their respective shares fall about 20 pc. Interestingly enough, this phenomenon even reaches into the upper-middle class, with those in the 80th to 90th percentiles also losing out.

Now this is, of course, the type of data that causes much wailing and gnashing of teeth when it is released and examined. After all, the idea of rich people becoming richer doesn't tend to sit well with people who aren't rich, particularly when the non-rich are facing all manner of economic calamities. When the upper-middle class are facing higher tax bills and school costs, and the middle-class are getting their benefits squeezed, and the lower-middle class are getting laid off, and the poor are stuck making eight bucks an hour, they're not exactly going to pull for the rich guy hoping this will be the year he hits the $30 million mark on the odometer. These reactions are all perfectly understandable.

However, I would caution this is the type of data you have to peel back like an onion if you want to get at the underlying truth. Plus, you can't look at it in a vacuum if you want to get an objective reading on the economic situation.

If you go take a look at the charts, you may well notice the spikes and dips in the top one pc's share of the national wealth mirror the performance of the financial markets. That makes perfect sense: it is easy to reap a lot of wealth when you have a lot to sow. When the markets do well, the rich benefit accordingly; when they do poorly, their share of the pie falls in commensurate measure to how the markets react.

Charts like these also don't factor in social mobility. Since their underlying data is a collection of snapshots in time, they don't account for the fact that the student who in 1979 was eating ramen noodles and driving an old Rambler American is now the prosperous division head of some million-dollar corporation, or the fact that today's twenty-something retail worker wasn't even a gleam in his father's eye back when the data series started. True, there are undoubtedly some workers who have remained stationary in their careers since the series started, but certainly those are in the minority of American workers.

Income charts are also tricky because they don't factor in other things, most notably personal wealth. But they also don't factor in real income -- by which I mean disposable personal income, the net income of Americans after they pay the Government their taxes. Since we have a progressive income tax system, and a system that levies tax at the federal, state and local levels, a rich American in a high-tax state may effectively pay 50 percent or more of his income in tax, while a poor American may effectively pay a rate ranging from a few percent down to well less than zero. (For instance, if you have a family on the dole, their income -- however meagre -- comes from the Government's largesse, and only a portion of that is recaptured via sales, excise and other taxes).

Speaking of disposable personal income, though, that brings up another question. If an American is getting a smaller share of the overall pie, but the size of the pie has increased to the point where he's still getting more pie than he did before, is he still getting screwed?

Now, I bring this up because America has gotten considerably richer than it was back in 1979. After all, think about 1979 for a moment. It was 1979. It sucked. In fact, July 12 of that year was the nadir of post-war American history, as I have conclusively proven here. Pleather. Gas lines. STAGFLATION! Carly Simon. I mean, my parents had plastic furniture in our living room. It was a bad year.

In July of 1979, the disposable personal income of the American people was roughly $1.8 trillion. That works out to roughly $8,000 for each of America's 225 million residents at the time. At the end of 2006, the disposable personal income of the American people was roughly $9.9 trillion. That works out to about $33,000 for each of America's 300 million residents at the time. Now, when you crunch those numbers through the GDP deflator, you find that a dollar back then is worth about 42 cents today. Still, the end result is that real per-capita disposable personal income has risen from $19,000 back in the day to $33,000 today. Thus, America is 73 percent richer than it was back when people wore wide ties.

That's just on a dollar-per-dollar basis too. After all, think of how life has improved since 1979 -- another thing income graphs don't tell you. In 1979, nobody had a personal computer, nobody had e-mail, nobody knew anything about the Internet, nobody could buy a decent car for love or money and nobody -- and I mean nobody -- could find a decent interior decorator. Instead you had shag carpets and plastic furniture and disco music and the death of equities and STAGFLATION! Oh, and Carly Simon. Who you listened to on something called a "record" -- or perhaps something called an "eight-track." And don't get me started about the regulated airlines or the 55 mph speed limit, 'cause we'll be here all night.

So now that we've established that Americans are collectively enjoying not just a bigger pie, but a much tastier pie at that, can we say people are getting hosed? For instance, the lowest quintile saw a roughly 30 pc drop in their share of the pie between 1979 and today. But they're still enjoying 21 pc more pie than they were before -- and much tastier pie. The middle class are enjoying 38 pc more pie. The upper-middle class perhaps have 50 pc more pie. One would generally think they are accordingly better off, because it's really good pie: kind of like the pie you get at a really good diner, compared to the three-day-old industrially-made pie you would get back in 1979.

True, the idea of seeing the rich guy get 280 pc more pie might stick in folks' craw a bit. But since people still have the individual opportunity to find ways to get more pie, with time they may soon reap the rewards of their labor with a giant slice of the stuff. After all, this is America.

Posted by Benjamin Kepple at January 2, 2008 12:37 AM | TrackBack
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