Income Disparity by the Numbers: Volume II- The One Percent

© Phil Wendt, 2012

This is the second in a series of essays on the issue of income disparity in the United States.  In the first essay (See: Income Disparity by the Numbers) I tried to lay out the basic metrics that describe and quantify income disparity in this country, both currently and historically.  After analyzing these data, four basic conclusions were drawn about income disparity as summarized below.

  1. The wealth of this country is being more concentrated over time into fewer and fewer people at the top.
  2. Upper end (top 20% and the top 5%) wage earners are not only earning more, their wealth is expanding at a faster rate than those in lower income brackets.
  3. The bottom 80% of wage earners have seen their share of aggregate wealth steadily decline over the past forty years, while the upper 20% has steadily increased their share of this country’s aggregate wealth.
  4. This income disparity is not a new or even recent event. In fact, it’s not an event at all, but a process that has been steadily ongoing, virtually unchecked, for the last forty years and more.

 

We can either have democracy in this country or we can have great wealth concentrated in the hands of a few, but we can’t have both.”

-Louis Brandeis 

U.S.  Supreme Court Justice  

 

The Data

In the first round of analyses, I used data collected by the U.S. Census Bureau as I felt these data were reliable and unbiased.  Unfortunately the Census Bureau data did not include information on the top 1% of wage earners.  Because of all the hype lately centered on the Occupy Wall Street (OWS) movement, I wanted to address this segment of society and understand its relationship to the overall income disparity picture.  In addition, the Gini Index of Income Disparity discussed in the first essay clearly showed that wealth is being concentrated into a smaller and smaller segment of the population as time progresses.  Therefore any data describing this economic segment will be helpful in gaining a more complete understanding of the wealth dynamic in this country.

When I was initially compiling data for my original essay, I chose to limit my analysis to data that was easily obtainable by anyone, and that was from an objective, unbiased source.  There was data on the 1% segment available; however I couldn’t readily determine its source or veracity, so I decided to exclude the 1% segment from my initial analysis.  In the meantime, I was able to identify several sources of 1% data, including the Congressional Budget Office and information provided in scholarly, peer reviewed journals (Quarterly Journal of Economics), which I will reference more specifically later.  There is no shortage of numbers in the literature on the 1%, but much of it seems to be unsubstantiated, or at least of unknown or suspect sources.  I’m sure there are other sources as legitimate as the sources I used in this analysis, but I wasn’t trying to do an historic retrospective on the subject.   So for now, as I move through this analysis I will cite my sources and let the reader be the judge. 

 

Rounding Out the Wealth Distribution Picture

Figure 1. Average Pre-Tax Income in 2007 Dollars

In the first analysis which didn’t include the 1% income segment the data showed a clearline of economic demarcation at the 80% income segment, where earners in the upper 20% saw their income and wealth share grow steadily over the last forty years, while those in the lower 80% saw their real income and wealth share stagnate or decline over the same time period.  Now with the 1% income segment as shown in Figure 1, it’s becoming clear where the wealth is indeed accumulating, and with an even wider gap evident between the top 1% and 5% than exists between the upper 20% and the lower 80%.  I would suggest that the gap between the top 1% and the top 5% may also represent another line of economic demarcation, this one separating the wealthy from the super wealthy.  Even though I believe that the 80%/20% demarcation line represents a more structural difference between these two economic segments, the secondary demarcation line at 1% shows the considerable economic and political power that resides within this small segment of our population.  It also helps to explain the attention this top 1% group has gotten through the OWS movement.

Figure 2. Top 1% Share of Total Pre-Tax Income, 1913 – 2008

So how does the 1% income segment fair in terms of share of the overall wealth in this country?  Figure 2 shows the share of total pre-tax income from 1913 to 2008.  These data show the current share of overall wealth to be over 20%: that means that over 20% of the wealth of this country is owned by just 1% of its people (this translates to just over a million people).  If one compares the overall trend line from 1979 through 2007 in Figures 1 (Income) and 2 (Wealth Share), the trends follow basically the same steep slope upwards over the same period.

There are also some interesting trends to note over the full historical record shown in Figure 2.  As I had shown in the first installment of “Income Disparity”, this trend of rapid and steep escalation of wealth and wealth concentration in the upper income ranks is by no means new.  It’s interesting to note that the two highest percentages in wealth share were in 1928 (23.9%) and 2007 (23.5%).  The following year of each of those peaks began the two worst economic downturns in history (1929 began the Great Depression, and 2008 began the Great Recession).  This situation was also noted by Thomas Piketty and Emmanuel Saez in their article “Income inequality in the United States, 1913-1998” published in the Quarterly Journal of Economics (2003), and later updated in 2010 with new data through 2008.   Is it possible that there is a certain ‘wealth carrying capacity’ for the top 1% in our economy?   Assessing cause and effect here in this instance is beyond the scope of this cursory analysis, although it might make for a good doctoral dissertation topic…for someone else.  However, assuming that there is a strong relationship between financial wealth and political power, then concentrating both wealth and power would make it more, not less, likely to have a catastrophic financial collapse.  Such a concentration of power facilitates the development of the “To big to Fail” scenario.  By the time you reach this point your options are severely limited as we saw in early 2008.

 

The Top and the Bottom

 

Figure 3. Average Real Income of Bottom 99% and Top 1% from 1913 – 2008

Now let’s take a look at the 1% and the remaining aggregate 99% together.  Figure 3 shows the annual real (adjusted to 2008 dollars) income of the top 1% and the remaining aggregate 99% from 1913 -2008.  The data had to be shown on separate axes in order to discern both trends more clearly.  The top 1% group shows that during the first half of the 20th century the income trend doesn’t follow the wealth share trend observed in Figure 2.  However, during the latter half of the 20th century and through today, the 1% income trend follows the wealth share trend quite well.  This is also consistent with the Gini Index data from the first “Income Disparity’ essay, at least during the period of record beginning in1947 from the Gini Disparity Index.  The Gini Index clearly shows that from 1947 onwards the wealth of this country has been concentrating into fewer and fewer people.  It’s also interesting to note that the income for the 99% income segment gained by only 5.7% during the period from 1973 to 2008.  During this same time period, the top 1%’s income rose by over 170%.  I would suggest that this further supports the idea of a secondary line of economic demarcation at the 1%/99% interface.  While the 99% group did actually gain during this 35 year period, an increase of just 5.7% over three and a half decades can’t really be considered ‘keeping up.’  What’s poignant about this meager increase is that we’re not talking about a small segment of our society here, but rather 99 percent of all those who work.  I remember years while working where a 5.7% raise was considered marginal in any one year. 

 

Figure 4. Average CEO Pay vs. Average Wage Income, 1970 – 2006

Earlier I discussed the relationship between wealth and power.  Along these lines I thought it might be interesting to look at a subset within the top 1%, namely CEOs, in comparison to average wage earners.  Figure 4 shows the average CEO pay (total compensation) versus average wage income during the period 1970 – 2006.  I think that the most salient point to be made here is that in order to adequately show the CEO data, the vertical axis had to be converted to a logarithmic scale.  CEO compensation has increased by several orders of magnitude over the past 40 years, while the overall average income has remained flat.  To bring this a little closer to home, think about this another way, namely that those folks included in the average wage earner category are the folks actually working for those CEOs.  During the 40 years when those CEOs were exponentially increasing their salaries, what was happening to those very wage earners working in those companies (the flat black line in Figure 4)?  They have seen their salaries stagnate, health benefits vaporize, and their pensions turned into 401k’s, if they’re lucky.

On a personal note, I worked for two Fortune 500 companies in the 70’s (Texas Instruments and Lockheed) and had excellent salary and benefits (health plans, pensions, and stock options).  I left private industry to work in public service for the State of California, and for the privilege I took an initial 45% cut in pay, but had received comparable benefits.  Over the 25 years I worked at the State, my salary increased as I moved up into higher positions, and my benefits remained intact.  Today, as a retired state employee with a pension and health benefits I have a target on my back because of my “luxurious” retirement plan.  I understand the frustration of those who do not have a comparable retirement plan.  But to those who work in industry and rail against those ‘flush” government workers, I can only turn your attention to Figure 4.  This disparity in retirement/benefits between the government and private sector is about what the private sector lost, not about anything structurally different occurring in the public sector in the last 40 years.  This discussion may seem a little too personal, but I tell this story to illustrate a point.  The question isn’t why does one sector have all these benefits, the question should be “…what happened to the benefits the private sector used to have?”  Again…see Figure 4.  This is not just about CEO’s but a corporate philosophy that values shareholder’s returns over its employees.  The issue here is about corporate power and wealth, and judging by the data shown in Figure 4, I’d say that the growth of the 1% is occurring at the expense of the remaining 99%.

 

“I think the point here is that there are limits to income disparity where ultimately there is a price to be paid for too much concentration of wealth within a society.”

 

Occupy Wall Street

In the first installment of Income Disparity I pretty much ignored the OWS movement as a topic because that’s not where my interest was focused.  However, within the context of an essay on the top 1%, I would be remiss if I didn’t at least touch on the OWS movement.  In one sense, I believe that the OWS missed the real point of economic demarcation, which I have shown to be the 20%/80% interface, but after analyzing the data on the top 1%, I believe that a secondary line of demarcation can be seen at the 1% level.  It also makes for a more appealing and dramatic mantra for a social movement.  Personally, I don’t think it particularly matters where that line is in terms of the OWS movement itself. 

To me, OWS is not about wealth distribution, but more about fairness, or a perceived lack of it. Why do banks get bailed out and not foreclosed homeowners?  That disparity is what I believe the OWS is focusing on, namely a  perceived different set of rules for the wealthy (1%, 5%, 20%???) than for the rest of society. Personally I believe that the free market has to play by the rules, and under strict market rules businesses that were too big to fail should have. If not, then individual homeowners should have been provided the same advantages as big business/banks.  Granted, there are some fools who should have figured out that there is no world in which you can buy a $700K house on a salary of $15K/yr.

But I do believe that we are at some sort of tipping point here, and I don’t fully understand all the socioeconomic subtleties that drove us to this point.  I believe it is real, even if it is not well defined or even represented accurately by OWS.  Seems like the rules have changed somewhere along the way, and perhaps we’re just starting to notice.

I for one probably wouldn’t have thought about the issue of income disparity had it not been for OWS.  In addition I believe that OWS may have had some part in prompting the Attorney General of Massachusetts, Martha Coakley, to file suit against the nation’s five largest mortgage lenders in December of 2011.  “There is no question that the deceptive and unlawful conduct by Wall Street and the large banks played a central role in the crisis through predatory lending and securitization of those loans,” Ms. Coakley said when announcing the lawsuit.  She continued…”The banks may think they are too big to fail or too big to care about the impact of their actions, but we believe they are not too big to have to obey the law.”

There are those who rail against Big Government, yet were adamant about that same government using its might to bail out Wall Street, with no strings attached. Homeowners were then were left to deal with the aftermath, while the banks got to stash away their bail out money.  Enter… OWS.  I sincerely hope that they can articulate just what it is that they want, because it would be a shame to waste the vast amount of energy spent by OWS and achieve nothing.

 

Concluding Remarks

I don’t believe that this analysis of the top 1% changes any of my conclusions in my first Income Disparity essay.  But I do believe that the information presented here creates a more complete picture of the overall income disparity picture in this country.  I think it clearly shows where a significant portion of the rapidly increasing wealth concentration in this country is going.  Social commentators often talk about this country turning into the land of the “Haves” and the “Have nots”.  I would suggest that it’s more like the Haves, the Have nots, and the Have-it-alls. 

When I first started looking into this issue, I really never asked myself the question of whether or not income disparity was inherently bad.  After all, we’re a capitalist based country and what is capitalism if not wealth concentration.  But the trends seem to show that the American Dream of working hard and getting ahead is not working the way some think it should. Wealth is concentrating into a smaller and smaller group of super rich, while middle income folks continue to lose more ground each year.  The top 1, 5, or 10% have concentrated their political power as well, turning the American Dream into basic crony capitalism. This has structurally changed the income disparity picture over time through exerting their political strength to rig the free market system by eliminating the risk inherent in a truly ‘free’ market system. Don’t get me wrong, no one should ever have to apologize for their success. Fairness is not a life’s guarantee, but the playing field should be level.

The term “Income Disparity” itself sounds like an indictment.  It’s not meant it to be, but after this cursory analysis, I believe it’s a fair question…”Are we at a point where the income disparity itself in this country is harmful?”

Piketty and Saez (2010) indicate that research has shown that this level of income disparity endangers our society in various ways including; limiting social mobility, disrupting the cohesiveness of communities, reducing longevity, increased drug abuse, increased crime rates, and reduction in overall child well being.  I think the point here is that there are limits to income disparity where ultimately there is a price to be paid for too much concentration of wealth within a society. 

As I noted in my initial analysis, this income disparity is not new and is growing wider all the time.  I don’t believe it is the result of capitalism at its best, but rather crony capitalism at its worst.  The free market is rigged where the ‘too big to fail’ don’t, and only the basic wage earner pays for the misdeeds of the uber-wealthy.  So the OWS may not have it figured out yet, but I think they’re on to something.  If nothing else, they got me thinking about it, and I hope that my analysis here got you thinking about it as well.

 

If you found this essay interesting, you may also wish to read my follow up essays: “Income Disparity by the Numbers: Volume III – How we got Here” and “Income Disparity by the Numbers: Volume IV – The 2012 Election: Wealth vs. Jobs

 

POSTSCRIPT:  Over the past month since I posted my original essay on Income Disparity, my brother Chris and I have had many discussions about this issue and the OWS movement.  We may be on opposite ends of the political spectrum, but those illuminating discussions helped me understand not just what he thought about these issues, but what I thought about them myself.  I’m grateful to him for spending the time to engage in fruitful discourse.  We certainly need more of that in today’s world.

 

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