Income Disparity by the Numbers: Volume III – How We Got Here

© Phil Wendt, 2012

 

This is the third in a series of essays on the issue of income disparity in the United States.  In the first two essays(See: Income Disparity by the Numbers, and Income Disparity By the Numbers: Volume II – The One Percent) I laid out the basic metrics describing income disparity in this country and started to raise issues regarding basic fairness.  The overall conclusions from the first two essays are 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. Significant expansion has also occurred over the last four decades in the top 1% of wage earners, where the 1%/99% interface can also be viewed as a secondary line of economic demarcation.
  5. 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.

 

…Republicans must adapt.  If they continue to insist upon rolling back the welfare state by using tax cuts to starve the beast or trying to privatize Social Security and Medicare, they will fail.”

            Bruce Bartlett, economic advisor to presidents Reagan and George H. W. Bush, from his book: The New American Economy – The Failure of Reaganomics and a New Way Forward. (2009)

 

In this installment I first round out the discussion on wealth, and its relationship to income and to power.  This was an issue that came up in responses to the previous essay on the 1 percent and I felt it warranted additional discussion.  Later I provide a perspective on how I believe we got here; I first focus on broader economic theories and their evolution over time.   Subsequently I delve into some of the details of tax policy and other social paradigms such as changes in labor policy, all of which served to expand the differences between the rich, the super-rich and the rest of us.

 

Wealth, Income and Power

Before I get too far into discussing causative factors of income disparity, I want to take some time to round out the discussion on wealth, its relationship to income and to power.  This was something I touched on in my previous essays, and it generated some interesting discussions that prompted me to look into this issue further. 

  • Wealth vs. Income

First, some definitions: “Wealth” can be defined as the value of everything a person or family owns, minus any debts.  “Financial Wealth” is essentially ‘non-home’ wealth, or net worth minus net equity in owner-occupied housing.  “Income” is what people earn from work, and also from dividends, interest, and any rents or royalties paid to them on properties they own.  These definitions are taken from G. William Domhoff, sociology professor at University of California Santa Cruz, from his article Who Rules America, Wealth, Power and Income, 2012.   Domhoff also provides some historic data on the share of financial wealth, and when combined with the Congressional Budget Office Data on share of income at the 1% level (From the last essay on Income Disparity), we can show quite vividly the relationship between financial wealth and income at the 1 % level. 

Figure 1

Figure 1 shows the combined data on financial wealth and income at the 1% level and while there are data gaps in the financial wealth data, one can see that the income data and the wealth data track pretty well over time.  More importantly, I think the most salient feature of this graph shows that, for the most part, the percent share of financial wealth of this country held by the top 1% is more than double the income share held by the top 1%.  So only looking at income significantly underestimates the wealth disparity in this country.  The income data may be more representative of the wealth of the lower 80%, as their wealth and income are closer to one and the same.  But while the trend lines between wealth and income may track fairly well, the financial wealth picture presented by the top 1% is another story in itself.  As seen in Figure 1, over 40% of the financial wealth in this country is held by the top 1%.  I should also point out that Domhoff also indicates that the 1% cutoff level is the traditional cutoff point for ‘the top’ in most academic studies.  An interesting corollary to this discussion is a study cited by Domhoff ( 2012), namely that of Norton and Ariely (2010) (“Building a Better America – one wealth quintile at a time”, published in Perspectives on Psychological Science) that when surveyed, most Americans have no idea how concentrated the wealth distribution is in this country.  While I discuss causative factors later in this essay, I can’t help but think that society’s general lack of knowledge concerning wealth distribution itself contributes to the unchecked nature of this overall trend.  I heard David Brooks, conservative commentator and New York Times journalist, on the Jim Lehrer News Hour say concerning the current Republican primary and the prominence of Mitt Romney, that most people don’t care about other people’s money.  Assuming this is true, this certainly helps to explain how such a lopsided distribution of wealth and income can occur and persist in this country virtually unnoticed over four decades .

Before I leave the discussion on wealth and income, I want to make a few more important points about where the concentration of wealth/income is really occurring.  In the first two essays I focused on the upper 20%, the upper 5%, and the upper 1% income brackets.  Well, when you really drill down into the numbers, one realizes that even focusing only on the 1% doesn’t really show what’s happening.  Domhoff makes the point that while the 1% level is the traditional cutoff for academic studies, it’s important to realize that the lower half of that 1% has far less than the top half of that 1%, and that both wealth and income are concentrated in the top .1%, or above. 

 

Figure 2

Figure 2 shows data taken from David Cay Johnston (2011), a professor at Syracuse University College of Law and Whitman School of Management, from his article “9 Things the Rich Don’t Want You to Know About Taxes.”  This figure shows several things, but for now I wish to focus on the rise in income of the upper percentile brackets (.1% and .01%) for the period after 1980.  While the lower 90% saw just a 1% rise in income from 1980 to 2008, these upper levels saw their incomes rise from over 50% to over 400%. The distribution of income growth was much more even across these various income levels in the three decades before 1980 than after.   I’ll come back to this figure again when I discuss overall tax policy, and especially Reaganomics, but suffice it to say that even within the top 1%, there’s considerable concentration at the very, very top. 

The first thing I learned when researching this issue is that all economic theories have a shelf life.  Unfortunately, you don’t ever find out when the working life of a particular economic theory is over until it’s too late.”

  • Wealth and Power

In my previous essays, I alluded to the relationship between power and wealth.  I thought it might be helpful here to discuss this in a little more detail, as this relationship has a bearing on future discussions of causality.  Domhoff indicates that wealth is often seen as a ‘resource’ useful in the exercise of power.  This power can be wielded through influence, such as contributions to political parties, lobbyists, etc., but also through grants and awards to experts to develop new policies beneficial to the wealthy.  In addition, wealth can be used to shape the overall social environment to advance the cause of the wealthy via donations to universities, museums, etc.  At the corporate level, wealth contained in stock ownership can be used to control corporations, which also has an effect on how society functions.  For example, in 2007 the top 1% owned over 38% of all stock owned, while the next 19% owned almost 53% of all stock.  That leaves only about 9% of all stock owned by the lower 80 %.  That’s 91% of all stock owned by the top 20% (Wolff, 2007).  That’s a significant amount of corporate control in the hands of just 20% of the people.

Today, just as wealth can lead to power, power can also lead to wealth.  Those who control government can feather their own nests in any number of ways.  We only have to look at the recent disclosure that members of congress have been exempt from the rules governing insider trading.  Only when the light of day was shined on this practice was congress forced by public outrage to enact laws to eliminate the practice (actually, this is not a law yet as congress is still wrangling over the definition of a lobbyist).  Domhoff also concludes that if the top 1% controls 30-35% of the wealth, and if the top 20% control 85% of the wealth, including over 90% of the corporate stock, it’s virtually impossible for the bottom 80 or 90% to get organized and exercise much power.

 

The Macro View: How Economic Theory Evolved to Change the Game

I thought that before I get into some of the specific areas of causation regarding income disparity, I would briefly go over some of the broader aspects of macroeconomics and how economic theory evolved since the Great Depression.  These broader economic theories, and understanding who controlled their use and ultimately their application, help to understand certain aspects of the current income disparity.

The first thing I learned when researching this issue is that all economic theories have a shelf life.  Unfortunately, you don’t ever find out when the working life of a particular economic theory is over until it’s too late.  Bruce Bartlett, who was an economic advisor to presidents Reagan and George H. W. Bush and responsible in large part in developing the Supply-Side Economic approach (Reaganomics) implemented by Reagan, discusses this in his book “The New American Economy, The Failure of Reaganomics and the New Way Forward” (2009).  Economic theories come into play as remedies for a specific set of problems or conditions.  When such new ideas are successful, there is a tendency to treat them as all-purpose answers for all economic problems, despite the fact that they may be applicable only under a certain limited set of conditions. 

Let’s start with the Great Depression.  This catastrophic economic meltdown was deflationary (lack of economic growth) in nature.  Enter Keynesian Economic theory, which essentially can be distilled down to the idea that budget deficits stimulated growth and inflation was due to low unemployment.  Implementing this theory through a policy of increased government spending got us through the Great Depression, but by the 70’s it was clear that it had run its course.  Enter Supply-Side Economics (Reaganomics) which basically took the view that slow growth resulted mainly from high tax rates and inflation was caused by the Federal Reserve creating too much money.  At that time the top income tax rate was 70% and inflation was rapidly pushing workers into tax brackets usually reserved for the wealthy.  Reaganomics, that is turning Supply-Side economic theory into policy, was very successful at addressing these problems, both politically and substantively, just as Keynesian economics worked to end the Great Depression.  After Reagan implemented Supply-Side economic policy in 1981 inflation rapidly decreased and growth was restored.  The top income bracket was reduced to 28%.

 

“And as for income tax policies, it’s also clear to see how the power and influence of the wealthy was brought to bear in prompting Congress and the White House to implement policies advantageous to them, by essentially bastardizing Supply-Side theory to suit their own agenda, while selling the idea as creating jobs and prosperity for all.”

 

Now, just as Keynesian economic theory ultimately outlived its usefulness and became discredited, Bartlett believes Reaganomics, still our current economic theory of practice, has reached the end of its useful life.  The idea that there is no problem that can’t be fixed by more and bigger tax cuts is over, but no one has convinced Congress of this yet, even when it’s painfully obvious to most economists that the GW Bush tax cuts were not especially successful.  Bartlett and other economists realize that the economy’s problems of today are due primarily to lack of demand, and not supply.  Reaganomics was an appropriate response to stagflation.  Tight money and tax rate cuts were a policy mix that worked well in the early 80’s, and carried a healthy economy well into the 90’s.  But in the first decade of the 21st century many policies were implemented in the name of supply-side economics that actually bore no resemblance to the Reagan era supply-side economic theory.  For example, supply-side economics said that only permanent tax cuts would actually change business’s and people’s behavior, yet all of the Bush tax cuts were temporary.  Big mistake!  Supply-side economics also said that only reductions in marginal tax rates had meaningful incentive effects, yet Bush’s tax cuts were rebates and tax credits which ended up having no incentive effects.  Bartlett believes that the failure of the Bush’s policies discredited supply-side economics just as inflation had discredited Keynesian economics.  (It should also be noted that discrediting the Bush economic policies got Bartlett summarily dismissed from his job at a conservative think tank, and has been viewed as a pariah within the GOP).  Bartlett believes that we are past the point where tax cuts can fix what ails us.  America’s penchant for tax cutting, the GOP’s signature issue for the past 30 years, has clearly waned.  A Wall St. Journal/NBC news poll shows Americans now favoring the democrats on this issue, and a new willingness to tax the rich in order to redistribute wealth and income. 

My purpose in providing this brief history of macroeconomic policy development is to show how economic theory grows into economic policy in response to a specific set of conditions.  Unfortunately when there’s a disconnect between economists who develop the theories, and Congress who develop policy based on those theories, we have a situation where our tools no longer match the problems we’re trying to fix.  I believe we are certainly at one of those crossroads now, and while those economic policies may no longer be effective going forward, they nevertheless had an impact on income disparity during the decades they were in vogue and beyond.  So now let’s take a look at how some of these specific polices converged to help drive the income disparity we see today.

 

How Economic Policy and Politics Changed the Wealth/Income Distribution

After looking at all the graphs and figures presented in the first two essays, it should be somewhat obvious that the income disparity paradigm is not just about the rich getting richer.  It is clearly a two part ‘process’, one in which wealth and income is concentrating rapidly and steadily over time into the upper income levels, and another process where the lower 80-90% are either stagnating or losing wealth and income share over time.  These are two very distinct processes, and I’ll discuss them separately.  I’ll first discuss how tax policy and changes in corporate compensation policies significantly advantaged the already wealthy.  Next I’ll discuss how labor policy served to disadvantage the middle class resulting in stagnating and declining wealth/income share.  It’s these processes taken together that produce the diverging trend lines in income distribution between the top 1% and the rest of us.

  • Income Tax Policy

The first major benefit to the top wage earners has really already been discussed, namely the reduction in the top marginal tax rate from 70% to 28% in the early eighties, thanks to implementation of Reaganomics.  The theory was, according to Johnston (2011) that lower taxes at the upper income levels will encourage more investment, which will in turn create more jobs and greater prosperity, what we now euphemistically call “Trickle-down Economics”.  As we saw in Figure 2 the effect of all this new investment and job creation didn’t really trickle down very far.  In fact, income appeared to trickle up, concentrating in the upper stratosphere of the wealthiest .1 and .01%.  Yes inflation was abated, but at what cost?  Wealth distribution became even more concentrated between 1983 and 2004 in good part due to tax cuts for the wealthy and the defeat of labor unions (Domhoff, 2012).  Of all the new financial wealth created during that 21 year period, fully 42% of it went to the top 1%.  A whopping 94% went to the top 20%, meaning that the lower 80% only got just 6% of all the new financial wealth generated in the U. S. during the 80s, 90s, and 2000s (Wolff, 2007). 

 

“These folks (CEOs) are the new financial superstars and what and how they are paid significantly affects the wealth/income disparity paradigm. By all accounts it’s an incestuous process, and it needs to have a light shined on it.”

 

Drilling down even further, Domhoff noted that income for the top 400 tripled during the Clinton administration, and double again during the Bush years.  How were such huge gains possible? – cuts in the tax rates on capital gains and dividends, which were down to a mere 15% in 2007 thanks to the tax cuts passed by GW Bush in 2003.  Since 75% of income for the top 400 comes from capital gains and dividends, it’s easy to see where tax cuts available only to the wealthiest among us mattered greatly to these richest of the rich.  Overall, the effective tax rate on high income fell by 7% during the Clinton years, and another 6% under Bush, so the top 400 had a tax rate of 20% or less in 2007, far below the marginal tax rate of 35% that the highest income earners (>$372,650) were supposed to pay.

Some would say that the progressive nature of the income tax system should reduce some of this inequality, but Domhoff (2012) says not really.   We need to consider all the taxes an individual pays, including sales tax, state and local taxes and payroll taxes.  In reality the top 1% income earners actually pay a smaller percentage of their incomes to taxes than the 9% below them.  What really matters, according to Domhoff, in terms of power analysis is what percentage of their income at different income levels pay to ALL levels of federal, state, and local government taxes.  In actuality, the tax system is progressive, but only for the bottom 80%, then it starts to level off, and for the top 1%, it slips backward.  This advantages the upper 1% and disadvantages the lower 80%, further causing those respective trend lines (the top 1% and the bottom 80%) to diverge.

On balance, the economy seemed to thrive, which doesn’t always translate to everyone thriving along with it.  Even today we see an apparent thriving marketplace, with the major economic indicators back to where they were prior to the great recession.  Yet unemployment is still very high.  So a rising tide doesn’t always float all boats.  The overall point here is that economic policies are a blunt sword at best, and while one segment of society can be advantaged by some policies, others may not fare as well.  And as for income tax policies, it’s also clear to see how the power and influence of the wealthy was brought to bear in prompting Congress and the White House to implement policies advantageous to them, by essentially bastardizing Supply-Side theory to suit their own agenda, while selling the idea as creating jobs and prosperity for all.  The GOP, and their conservative think tank marketing machine of the Heritage Institute, the Cato Institute and others, is still relentlessly trying today to sell the dream of lower taxes being the path to making us all better off (Johnston, 2011). 

 

  •  Corporate Tax Policy

Figure 3

So now let’s take a look at corporate tax policy and its effect on income distribution.  For years we’ve listened to U.S. corporations bemoan the 35% corporate tax rate, and continually push for a lower and lower tax burden.  But do these companies really end up paying the full 35%?  Figure 3 shows data from the IRS and presented by Johnston (2011) on corporate profits vs. corporate taxes paid in 2000, and 2008.  The effective tax rate for the $249.9 Billion paid on $1638.7 Billion in profits was 15.2%, less than half the 35% corporate tax rate.  In 2008, it got even better, where $230.1 Billion in taxes paid on $1830 Billion in profit resulted in an effective tax rate of only 12.6%, an 8% decline from 2000.  At the time of writing Johnston’s article, the 2010 data wasn’t firmed up yet, but preliminary figures indicate that the effective rate fell yet again and was 23% lower than 2000. 

So how is all this apparent tax dodging possible?  Loopholes.  Johnston (2011) indicates that in 2007, for example, U.S. multinational corporations took 25% of their offshore profits to five tax havens: Bermuda, the Cayman Islands, Ireland, Singapore, and Switzerland.  So despite all the hoopla over America having the world’s second highest corporate tax rate, the actual taxes paid by corporations are falling (even though profits are rising) because of the growing number of loopholes and tax havens like the Caymans.  This sounds like an old-time “60 Minutes” episode. 

Another form of corporate welfare comes in the form of “Repatriating” offshore profits (Johnston, 2011).  For example, in 2004 the American Jobs Creation Act allowed more than 800 companies to bring untaxed profits from overseas back to the U.S.  Instead of paying the required 35% tax, they were allowed to pay just 5.25%.  Senator John Ensign (R, Nev.) said this would mean over 600,000 new jobs (again, the mantra ‘low taxes equals more jobs’).  The pharmaceutical company Pfizer was the biggest beneficiary, bringing home $37 billion and saving $11 billion in taxes.  Immediately Pfizer began firing people, and since the law took effect, Pfizer has let 40,000 workers go.  In all, over 100,000 jobs were lost.  And at the time of Johnston’s article, Congressional republicans and some democrats were preparing another Jobs Creation Act which would affect 10 times as much money as the 2004 Law.

So you might ask…interesting, but what does this have to do with income disparity?  Actually this has very much to do with a major component of the wealth side of income disparity; the new superstars – CEOs.

 

  •   Executive Pay and the New Superstars: CEOs

As I had showed in my last essay CEO pay had risen dramatically, geometrically actually, over the last few decades.  Domhoff (2012) suggests that this rise in CEO pay may reflect the increasing power of CEOs as compared to major owners and stockholders in general and not just their increasing power over workers.  According to Domhoff, CEOs may now be the center of gravity in the corporate community and power elite, displacing the leaders in more traditional wealthy owning families.  This new aura surrounding the CEO was also discussed in an article by the National Bureau of Economic Research on income disparity.  They distinguish between superstars whose income is market driven, like investment bankers, and those whose compensation are “Peer Driven” like CEOs.  There is also another market driven group which includes lawyers and other professionals.  Even among these groups, income disparity is observable, where the real superstars are the CEOs and they are pulling away fast.  The NBER study also states that “CEOs, through compensation committees and inbreeding of Boards of Directors have a unique ability to control their own compensation.  Furthermore, if a director approves a higher compensation package that may subsequently lead her to receive more compensation at her own firm.”  In a study of 1500 firms in 1993-95, compensation earned by the top 5 corporate officers equaled 5% of the firm’s total profits.  By 2000-02 that percentage more than doubled to 12.8%.

Domhoff also suggests that the way the compensation is arrived at for a CEO explains the meteoric rise in CEO pay over the past decades.  The primary reason for such a dramatic rise in compensation and stature of the CEO primarily involves the way CEOs are now able to rig things so that the boards of directors, which they help select, and which includes some fellow CEOs on whose boards they sit, gives them what they want.  The trick is in hiring experts, called “Compensation Consultants” who give the process a thin veneer of economic respectability.  This process was explained by Edgar S. Woolard, retired CEO of DuPont, who is now chair of the NYSE’s Executive Compensation Commission.  Basically he says that the idea of CEO’s salaries being set by the competition for their services in the executive labor market is pure “Bull”.  As to the claim that CEOs deserve higher salaries because they “create wealth” he says is a “Joke.”

This may seem like an overly specific discussion of a rather arcane process most of us will never encounter, or should even care about.  In my research for this essay, I ran across this issue in several of the articles I reviewed.  CEO compensation is a process, like implementing an economic policy is a process, and like implementing an economic policy, it has ramifications.  Just because CEO pay seems to affect so few individuals, should not be a reason to discount this issue from the income disparity discussion.  Rather, I believe that this issue is a central component of the income disparity issue, at least on the wealth side of the equation.  Review my prior graphs of CEO pay, and the current information I presented earlier in this essay on wealth concentration, and you can’t help but see how significant a share of the total wealth is held by such a small percentage of Americans, the top .1 or even .01%.  Just who are these .1 and .01%ers if not CEOs?   These folks are the new financial superstars and what and how they are paid significantly affects the wealth/income disparity paradigm. By all accounts it’s an incestuous process, and it needs to have a light shined on it. 

  •  Labor Policy

 While issues relating to tax policy and corporate compensation helped elucidate the wealth side of the income disparity equation, the economic doldrums of the lower 80-90% is better understood through the lens of labor policy.  Domhoff cites the fact that wealth distribution became even more concentrated between 1983 and 2004 in major part due to the tax cuts for the wealthy, and also the defeat of labor unions.  But even before this decline, Domhoff cites an all-out attack on labor unions in the 60s and 70s (Gross, 1995).  This decline in union power was fostered by both outsourcing at home and the movement of production to developing countries, which was facilitated by the breakup of the New Deal coalition and the rising New Right.  Domhoff further suggests that it signaled a shift of the U.S. from a high-wage to a low-wage economy.  Studies have also shown (Stephens, 1979) that strong trade union and social democratic parties correlated with greater equality in the income distribution and a higher level of welfare spending. 

 

Figure 4

Figure 4 shows the long-term and continual decline in the percentage of union workers in the overall labor force from 1973 -2011 (Data from Hisrch and Macpherson, 2012).  This figure shows more than a 50% decline in union labor as a percentage of the workforce during this period.  Now I have to confess to never being a big fan of unions, as I felt that they were responsible for driving up prices.  But I also realized that even if you weren’t in a union, union wages and benefits often set the bar for non-union and even management in terms of salary and benefits.  This relates back to the earlier discussion on power and influence.  Unions never had the power of wealth behind them, but they did have the power of their numbers to gain influence at the corporate level, and at the political level.  With the decline in overall numbers, also went their decline in overall influence.  

 

Figure 5

Figure 5 shows the decline in both health benefits and defined retirement benefits for employees of medium and large private U.S. companies from 1980 – 2010 (Employee Benefit Research Institute, 2012).  This graph showing the decline in both retirement benefits and health insurance coverage tracks well with the decline in union membership.  Since 1980 those with health benefits in medium and large private companies decline by 35%, and those with defined retirement plans declines over 64%.  I believe that without the influence of collective bargaining Corporate America was much freer to enhance the compensation for its new CEO superstars and increase shareholders return at the expense of its workers.  Benefits such as health care and retirement benefits have classically been achieved through collective bargaining, and with the declining influence of unions, all workers lost power and influence and benefits along with it.  This loss in health benefits is especially critical as it contributes to the already overwhelming problem of insufficient health care in this country.  Even those with health benefits have seen their out of pocket cost increase significantly as overall health care costs still continue to rise dramatically each year.

Although I’ve focused here on labor policies as a factor in the decline in income and wealth share in the lower 80%, I by no means intend to deny the impacts of federal tax policy on this income group.  The tax policies described earlier not only worked to advantage the top 20% and especially the top 1% and above, they also served to maintain the status quo of the middle class by maintaining the progressive nature of the tax code for the lower 80%, while allowing the top 1% and above to avail themselves of greater tax breaks under the guise of stimulating investment and creating jobs elsewhere in the economy.  Unfortunately, as we saw in Figure 2 and in the data presented in earlier essays, these “benefits” to the middle class never materialized.

  

Concluding Remarks

 In this essay I’ve tried to round out the discussion on wealth and power, and more importantly provide a basis for understanding some of the basic underlying factors contributing to the unprecedented income disparity occurring over the last 40 years.   When I first engaged this issue I was mostly interested in quantifying what I perceived as an inequity in how wealth and income is distributed in this country.  I probably should have let it go at that, but my curiosity got the better of me and I had to see if I could distill some sense of causality from the literature.  As in my earlier essays, I tried to focus on sources that were non-partisan, and bring a certain level of quantification to the discussion.  This issue is far more complicated than I presented here, but I feel like I was able to track down most of the low hanging fruit and bring it to light. 

The following is a summary of my major conclusions regarding wealth and income disparity and the factors contributing to this disparity.

1.   All economic theories have a shelf life.  The failure of the G.W. Bush tax policies has discredited supply-side economics (Reaganomics) just as inflation had discredited Keynesian economics.  We are well past the point where tax cuts can fix what ails us, and continuing to do so only exacerbates the ever expanding income disparity in this country .

2.  Data on wealth tracks well with the income disparity trends, only the share of wealth in this country by the top 1% is more than double (about 40%) that of income held by the top 1%.

3.  Wealth and income in this country is not just concentrated in the top 1%, but even more concentrated in the upper .1 and .01% income levels.  While the income of the lower 90% increased only 1% from 1980 – 2008, income at the highest levels, .1 and .01% levels, increased from 50% to over 400% respectively.

4.   The income disparity paradigm is essentially two separate processes; one macroeconomic process that controls the increase in wealth, and a second process controlled more by labor policy that affects the stagnation of the lower 80% income levels.

5.   Reaganomics and the trickle-down theory did nothing for the lower 80% of income earners, but of all the wealth created between 1983 and 2004, 42% went to the top 1%, and a whopping 94% went to the top 20%.  That left a paltry 6% of the remaining wealth to trickle down to the lower 80%. 

6.   Corporate tax policy has, through various loopholes and the prevalence of offshore tax havens, created a culture where a new superstar, the CEO, rules the roost.  Who are these .1 and .01%ers if not CEOs?  What and how these superstars are paid significantly affects the income disparity paradigm.

7.  The stagnation and decline in income share of the lower 80% can be seen as a result of a long-term attack on unionized labor, where the decline in unionized labor and their influence on collective bargaining coincides with the decline in health and retirement benefits of private sector employees, as well as the overall decline in income share across the board.

 After spending some time researching this issue I realize that income disparity is a function of many disparate factors all working simultaneously.  Some of this disparity has to do with the normal functioning of capitalism which, by definition, is about concentrating wealth.  Some of it has to do with an honest attempt by our government to stem the tide of inflation and stimulate the economy, based on sound economic theory, through reducing tax liabilities at the upper income levels.  This worked well, right up until it didn’t.  As has been the case with the evolution of economic theories of the past, supply side economics has outlived its usefulness.  Unfortunately, some in congress and those with a stake in wealth protection, began bastardizing this failing economic theory to their own advantage, which further added to the income/wealth disparity.  In addition, the rise of the newest wealth superstar, the CEO, created through an incestuous peer-driven process, further added to the unprecedented level of wealth concentration at the highest income levels.  I believe this too will fade over time.  While all this was happening corporate interests took advantage of their leverage in congress to slowly reduce the effectiveness of organized labor, which only helped to further stagnate wages and income for the middle class.  There’s no smoking gun here, just many players in a high-stakes game of full-contact politics that has played out over the last forty years. 

One more thought about the perils of income disparity at the level that exists today in America.  Such extreme levels of income disparity also lead to political disparity as well.  It used to take an entire industry’s army of lobbyists to exert enough influence to move congress in one direction or another, or to affect the outcome of an election.  As we have seen in the current Republican primary it now only takes one or two well healed benefactors to significantly change the complexion of a national election.  This is extreme income disparity at work.  If you’re OK with this form of representative government then my issues are not yours.  We, as a country, have always lived with a certain level of inequality in terms of political influence…we just call it “Politics.”  I believe we have reached a tipping point here, and this current election may be just the beginning of where the trajectory of income disparity is going to take this country.

The question now is where do we go from here?  Bruce Bartlett suggests that in time republicans will have to face the fact that Reaganomics is dead in the water, and they will have to work with democrats in developing the next generation tax plan.  The welfare state is here to stay because there are just too many folks reliant on these programs to dismantle them.  Republicans will have to work with democrats in order to develop a balanced tax proposal that won’t bankrupt the country and will efficiently manage the programs that are indeed here to stay.  Bartlett, and many others, sees the idea of a VAT (Value Added Tax) as the way forward, but that’s a topic for another time.  Economic theories take a while to evolve into economic policy, and it will take a congress and White House significantly more united than we have now to get it done.

 

 Further Reading:  You also may wish to read my follow-up essay: “Income Disparity by the Numbers: Volume IV – The 2012 Election: Wealth vs. Jobs.”

 

References

 

Bartlett, Bruce (2009) The New American Economy: The Failure of Reaganomics and a New Way Forward.  Palgrave, Macmillan.  266 pp

Domhoff, G. William (2012).  Who Rules America, Wealth, Power, and Income?  (Taken from: http://www2.ucsc.edu/whorulesamerica/power/wealth.html)

Employee Benefit Research Institute (2012). EBRI Databook on Emplyee Benefits, Chapter 4: Participation in Employee Benefit Programs.  (Taken from: http://www.ebri.org/pdf/publications/books/databook/DB.Chapter%2004.pdf)

Gross, J.A. (1995).  Broken Promiss: The Subversion of US Labor Relations Policy.  Philadelphia: Temple University Press.  (As cited in Domhoff, 2012)

Hirsch, Barry T., and Macpherson, David A. (2012). Data on: Union membership, coverage, density, and employment among all wage and salary workers, 1973-2011.  (Taken from  http://www.unionstats.com/)

Johnston, David Cay (2011).  9 Things the rich don’t want you to know about taxes.  (Taken from:  http://wweek.com/portland/article-17350-9_things_the_rich_dont_want_you_to_know_about_taxes.html)

National Bureau of Economic Research (2012). The causes of rising income inequality. (Taken from: http://www.nber.org/digest/dec08/w13982.html)

Norton, M.I., and Ariely, D (2010).  Building a better America – one wealth quintile at a time.  Perspectives on Psychological Science.  (As cited In Domhoff, 2012)

Piketty, Thomas, and Saez, Emmanuel (2010).  Income inequality in the United States, 1913 -1998, Updated through 2010.  Quarterly Journal of Economics 118(1), 2003, subsequently updated -2010.  (Taken from: http://elsa.berkeley.edu/~saez/piketty-saezOUP04US.pdf)

Stephens, J. (1979) The Transition from Capitalism to Socialism.  London: Macmillan.  (As cited in Domhoff, 2012)

Wendt, Philip G. (2011).  Income Disparity by the Numbers. (Taken from: https://philwendt.com/?page_id=506)

Wendt, Philip G. (2012). Income Disparity by the Numbers. Volume II – The One Percent.  (Taken from: https://philwendt.com/?page_id=597)

Wolff, E. N. (2007) Recent trends in household wealth in the United States,: Rising debt and the middle class squeeze. Working Paper no. 52 .  The Levy Economics Institute of Bard College.  (As cited in Domhoff, 2012)

 

 

 

 

4 Responses to Income Disparity by the Numbers: Volume III – How We Got Here

  1. Chris Wendt says:

    Thoroughly researched and well-written study, Phil.
    I am limiting these remarks to the “Wealth, Income and Power” portion. Later, and separately, I will react to the other portions of this paper.

    I still have issues with mobility and longitudinal tracking of the data and therefore with the results and conculsions drawn from that data and the trends inferred.

    The first issue is that Figure 1 presumes that the same people who are the 1% wealthiest are also the 1% highest income recipients. I submit that, although many of the names would appear on both lists (wealthiest and highest income), there is no direct correlation between either membership or ranking of the names on those two lists, and, that there are people on one list who do not appear on the other. I will agree that the respective disparaties “track” very well between the 1% or 0.1% wealthiest and the 1% or 0.1% highest income recipients, but would not necessarily agree that there is an implicit post hoc ergo propter hoc relationship between the lists.

    The second issue remains, for me, the fact that the names have not remained the same, and in fact the memberships of both the top-one-percent-wealth and the top-one-percent high income recipients lists exhibit greater change relative to the span of time over which the trend of apparent concentration is considered. New entrants emerge, old timers age out or die off; people are always striving to increase both their wealth and income, and for some, power also; that, over time, people’s striving meets with variable and changing degrees of success or failure of expectations; that many who succeed will later fail or otherwise decline from the 1% summits, or from whatever is their individual highest level or wealth, income, and power they will attain during their lives.

    At first (third) blush, to me this comes down to the fact that there are trend lines for wealth, income, and power accumulation which trends have accelerated and grown asymptotically for generations, but, that the one percent, or the 0.1%, or the 80% are all just data points along trend lines, rather than any censuses or enrollment. You, I, everyone, stands somewhere along each of those trend lines today, yet where any of us stand on the wealth line may be far different from where we stand on the income graph, or on the power curve. Yet again, where any of us are standing today on any of these charts may bear little resemblance or indication to where we will be standing in the future.

    Therefore, I think 1% or 0.1% represents opportunity, or potential, rather than membership status. While eschew their current status if their wealth or income status is below the 1% pinnacle, their gripe or dissatisfaction should probably NOT be with how high is the mountain.

    I would also submit that there is an intuitive sense, actually a seemingly empiracle sense that income velocity leads to accumulation of wealth, leading to amassing of power. Some of the disillusioned 99-percenters seem to be advocating a new hypothesis about a new paradygm:

    First, drum-up some power, and then that power will yield income leading to wealth.

    They are still working on their drumming skills. They would do well to dwell on improving their vocabulary, instead: words, concepts like “resume”, “job”, “employment”, “work”, “earn”, and “paycheck” would probably be the best place for any of them to start.

  2. Phil Wendt says:

    Excellent comments!

    Yes I understand your issue concerning the income vs. wealth figures. My rationale in combining these data into one graph was more comparative than correlative. I think you had raised the issue in prior articles about the relationship between wealth and income. My intent here was mostly to show that comparison, and that focusing solely on income, or using income as a surrogate for wealth was inaccurate. My point here was to show that looking at income alone will significantly underestimate wealth disparity, and it looks like by a factor of about 2:1. I’m not concerned, at least not at this point in the narrative, about who’s in each category, but I get that somewhat later in the discussion.

    As you suggest, each data point on these and prior graphs represents a different membership list. What remains the same is the slice (1%, .1% etc.) of the population included, and the main variable is the proportion of wealth/income represented by that slice, which is what I really wanted to track. Naturally the membership changes through immigration/emigration to and from the list. Understanding who might theoretically be included in the top ranks (such as CEOs) helps to then identify policies that may have contributed to the trend of wealth/income concentration. And I agree that where we stand on any of these trend lines will vary over time, and that’s my point. If you’re happy with where you are, and/or how you got there, or where you think you’ll be in 5 years, then my issues don’t relate to you. My intent was to bring this to light so that you may have a better sense of, at least, why you ended up where you are, and to show how the rules/policies that forged those trends relate to where you end up. Some seem to think that they have much more control over where on the curve they end up (work hard, get a good education…). If you’re a .1 or .01%er, then you probably have significantly more control over this than if you are only a 10 or 20, and especially an 80%er. My intent was to bring into greater clarity the true nature of the Golden Rule, namely “…he who has the gold makes the rules”.

    If, as you suggest, the 99% are drumming up a new paradigm of Power –>Income–> Wealth, then I would say that this is the same paradigm that created the existing income/wealth disparity paradigm at the 1% and above level. This should be seen as part of their education, namely understanding how the world works, and not just how to be a good worker. Educate, organize, and above all…get a voice. 25 years in public service taught me how well this works for getting the disenfranchised heard.

    I agree that we all have to take responsibility for how well prepared we are to compete in this game, but I am also trying to make it clear just what else you’re up against. But I think our main difference in how we look at this may be that I’m looking at this in a broader, policy/macro level, and you seem more focused on how well it may apply at a more granular level. Such application testing may sometimes help in testing broader hypotheses, but overall I think that will always be a push.

  3. Arthur A. Meyer (Art) says:

    I have tried to get at the topic of economic inequalities and a corollary of political inequality .
    Your noting that the issues are a process led one respondent to suggest that being among the top at one time is no guarantee that you will stay there seems a bit irrelevant to the macro reporting . And there is the concept suggested by Piketty that if things continue as they are it could well result in a permanent ruling class by virtue of inheritance .
    I would be curious if you see the use of such terms as ‘oligarchy’ and ‘Plutocracy’
    as primarily valuable as tools which the 99% could use to drum up support or if in light of the studies do capture a significant
    reality regarding who rules especially
    since the decline of unions which did enhance the powers of the lower income workers by providing an institutional
    voice – which research compiled by Schlosmon et al seems to make abundently clear ?
    Plutocracy or not ?

    • Very interesting question, Art. In terms of the use of the term”Plutocracy” I think the cat is out of the bag in that it seems to have krept into the lexicon of main stream media already. The term seems to fit the overall inequality discussion. I think that it’s only natural that as a public discourse develops about something as complicated as income inequality that a more refined language will evolve in order to attempt to define it better, or differently, perhaps. This may have a down side in that the new short hand may also put limits on the overall scope of the discussion. Oligarchy and Plutocracy are really end points, and I was really interested in the “Process” as I called it that got us where we are today. Putting a name to it, like plutocracy may help in garnering public support but in reality I see the terms “Income disparity” or “inequality” also as perfectly reasonable terms, albeit not as glitzy as plutocracy. So while terms like plutocracy and oligarchy may fit the discussion, I think it’s just as important to understand how we got to this point if we are ever to have a chance of upsetting the process that got us here.

      One additional point: focusing solely on the plutocrats misses the point that there are really two processes at work here. One that fosters a continued growth of the plutocrat’s power and wealth, and another that is directed at keeping the middle class stagnating at historic low levels. Perhaps there’s a handy little term that captures that, like “Wage stagnation.” It’s not just about how wealthy the plutocrats are; there should be a greater sharing in the wealth generated by an economy as strong as ours.

      Thanks very much for your interest and your comment. I hoped I answered your question.

      Phil

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