What Does Inequality Mean to You? Conservatively, About $10,000 a Year

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Crabbing About Inequality

When the staid, straight laced, Wall Street economists at Standard and Poor’s (S&P) jump on the “inequality,” “growing gap between rich and poor,” “shrinking middle” class bandwagon, you know these issues have moved well beyond the imaginations of class warriors, left wing think tanks, and liberal French economists.  This story should have gotten more exposure.

The recent, surprising, analysis by S&P said that part of the reason for the slow and fitful economic recovery is lack of spending power by the middle class.  Record high levels of income and wealth inequality are a big reason, according to S&P, why consumption has been slow to rebound and why the recovery has not been stronger. Wow!

That of course is not a new theory.  Distinguished Columbia University economist Joseph Stiglitz and Berkeley public policy professor Robert Reich,  for example, have written and lectured extensively on inequality and how it’s been a drag on the U.S. economy. But, coming now from S&P,  deniers (at least the open minded ones) will find it harder to dismiss that viewpoint.  Hardcore deniers will dismiss anything and everything along these lines.  Or, they will say it doesn’t matter.

Still, public opinion about Inequality, what it means, if it’s real or not, and whether anything can (or should) be done about it, is “all over the place,” as Pew survey researchers have found.

Despite many words, graphs, and charts starkly depicting how much better the “one percenters” have done than the rest of us, we really haven’t heard much about what rising inequality means to the average household.  A big reason is that the question hasn’t been posed in a way that leads easily to answers that mean something to dwellers on Elm Street or residents at the Cabrini Green projects. I credit my colleague Kurt Lightfoot, with helping me understand that.

So, instead of asking how much the gap has widened between rich and poor, or between the middle class and people in the top one percent — questions that scare a lot of folks – lets pose the question this way:

How much more income would you have if your slice of the American Pie was about the same today as in 1980?  And what could you buy with that extra money? 

What could possibly be scary about that?  Now we’re talking about American apple pie, and how big your slice is today compared with thirty years ago?  (We could do this with pizza too). Three charts give us the answers. Alas, neither are pie charts. Look first at Chart #1

chart 1

Chart #1

If you break households into “quintiles” (five groups each representing 20% of all households, aligned from lowest income earners to highest), the average income for the middle class (adjusted for inflation) rose about 10 to 20 percent.

I’m loosely defining middle class here as the second and third quintiles, with average incomes of $30,000 to $50,000 in 2012. Arguably, the fourth quintile (households with $80,000 average income) could be included in the middle, but that group includes a lot of households making over $100K, which would be typically regarded in the “upper middle class.”  Regardless, the data is there for each quintile, so you can choose whichever definition of middle class seems more reasonable.

I’ve broken the highest quintile (the top 20 percent of earners) into two smaller groups: (1) the next highest 15 percent of households (by income), and (2) the top 5%. These groups saw their average household incomes rise by about 55 percent and 80 percent respectively.

Chart #2

Chart #2

Chart 2 gets right to the point, and answers the question: “How much more income would the middle class be earning today (actually in 2012) if its slice of the American Pie had remained the same as in 1980?”

The simple answer is: About $10,000 more per household. Or $100,000 more over a decade.

While that’s substantial foregone dollars for the middle class, visually, Chart #2 may not convey the huge difference between how much incomes actually grew for the middle class, and what growth would have been if everyone’s slice of the pie had grown equally. Chart # 3 depicts that.  Had their slice of the American Pie remained the same, the lowest three quintiles would have seen their average income growth between 20 to 30 percentage points more than actually happened.

chart 3

Chart 3

That’s still about the most conservative estimate you will get from any rigorous look at the data. Thomas Picketty and Robert Reich would say I was “lowballing” it, and that I must be a Wall Street lackey.  Picketty, of course, used “wealth” instead of income to look at disparities. I discuss some of the pros and cons of that in the “caveat emptor” section at the end. Optional reading.

Even if it’s a lowball estimate, $10,000 a year is a lot of foregone dollars. On an annual basis, half of that lost income would pay for decent health insurance coverage  (without Obamacare), with enough left over for a nice, well deserved vacation at a couple of national parks, to celebrate a clean bill of health from the doctor.  Those trips are good for the family and for Arizona.  Or a decent three bedroom apartment, instead of a one bedroom place where the kids sleep on a Murphy Bed in the living room.

Over a decade, the foregone income is $100,000.  Enough to help pay for a kid’s college education at a good school, without her incurring $100,000 in student loan debt, which not only makes her poor, but seriously weakens the overall economy because now she can’t afford to buy a home and start a family (or vice versa).

Chart #2 also says that the top 5 percent of households would be making about $70,000 less per year if everyone’s slice of the American Pie had grown the same since 1980. The S&P economists point out that (1) not much of this $70,000 would have been devoted to consumption spending here at home by this upper income group,  while (2) nearly all of the foregone $10,000 would have been spent by the middle class for consumer goods and services here at home.  And (3), that there’s a lot more people in the middle class than in the top 5%. That is why S&P thinks the slow economic recovery is related to severe income inequality. QED.

Caveat Emptor

As I said in the main body, we’re looking at this from an “income” rather than “wealth” perspective. The widening gap in wealth among the top, middle and bottom is much greater than the growing gap in income. But wealth is more difficult to measure. And it’s much harder to say what more we could buy, if we were wealthier. Income includes things like wages and dividends.  Its liquid.  Its cash.  Wealth is assets, like stock and the value of your home,   But its very important to note that the answer given here to what difference it makes if your slice of the American Pie had remained the same, is very conservative. i.e., it’s a low number. Not because I’m trying to “lowball” it; but because of the technical issues  I mentioned. 

Also, the data are not adjusted for the vast growth in households with two or more wage earners.  To the extent the “middle class” has kept pace at all, its (largely) because a much higher percent of households today have at least two earners, compared with 1980, and even more so compared with any other period, before nearly all women entered the labor force.

The best data I could find for this analysis is not fine enough to look at how much the slice of pie has grown for the top 1 percent of the income distribution. But it still tells the basic story. I was able to break out the top 5 percent. BTW, the Congressional Budget Office, using more detailed data, estimates that average income increased by 200 percent for the top one percent of earners in this same period.

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9 thoughts on “What Does Inequality Mean to You? Conservatively, About $10,000 a Year

  1. Alex MacLachlan

    Personally Irv, I think comparing two individuals by the outcome of their talents or lack there of is kind of pointless. To put these income charts in perspective, a cost of goods and services chart over laying the data would be helpful. I have contended for some time the only thing holding the middle class down and their standard of living, is skyrocketing inflation and dollar devaluation. Most of these things are government imposed as a cost of doing business passed down to the consumer, thus lowering their standard of living. Saying “it’s not fair” that rich guys can afford the inflation and poor people can’t so we are going to raise your cost of doing business, is just politics and counter productive. Houses in the 80’s were 100k-150k for the working class, gas was $2, a six pack was $3, your sewer and water bill was $40, cable $40, medical insurance $50/mo, college was $4k a year for State and $12,000 a year for, say, USC. Everything has tripled or quadrupled and we are spending our valuable resources bitching that the rich are rich and everyone else is poorer because they can’t buy as much as they used to for an affordable price. The root causes of inflation are only speeding up and will outpace any increase in incomes that come with an improving economy. As long as we have more than half the country voting for more inefficiency, more incompetence, more government answers to every little thing, waste, inflation, and dollar devaluation will follow. You can’t create the entrepreneurial, risk taking, self interested, vibrant economy we need, producing jobs and funding the social safety net, in an environment where a powerful, multi leveled central government, places itself in an adversarial and punishing position to every human endeavor. Unless you have a chart for that, I think we are ignoring the 800 lb gorilla in the room.

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    1. Irv Lefberg Post author

      Alex, I really appreciate your willingness to attack this Enchilada (inequality thing) with a big conceptual hammer and from a big picture viewpoint.. I genuinely invite you to write a feature article for this blog when you have the time , that lays it all out. I think some of the things you mention in the second part of your comments (after the inflation part) about what half the country and government are doing to make matters worse (or cause it in the first place) are mostly a consequence of an economic system gone awry, rather than the cause of it. But (I agree) once the wheels start to fall off the wagon, it starts going both ways, so that some of the things people demand and government tries (like the really bad mortgages and student loans) dig the hole deeper. Both of those deeply flawed (well intentioned) efforts, , were to address inequality (the ownership society, more education to “create” higher paying jobs, and so on). Regarding inflation as a major cause or demise of middle class — that’s one area where I don;t get the argument (and will ask you to explain it more next time I;m in for a wrap and wine or rap and whine 🙂 (Not bad for early morning :)) We had some serious inflation for some of the first 30-40 years after WWI, I which actually abated after the Volcker led recession. But we had a semblance of a real middle class for those decades, which has fallen apart since 1980s. Middle class incomes kept up with rising prices for cars, homes, etc, Even my working class , retired father could still afford a decent car in 1985. And lived in a nice apartment (if not a house). Anyway, there is this big picture view point around inequality that a lot of conservatives truly believe, including inflation, coming off the gold standard, role of federal reserve, that I don;t really get, but am open to being persuaded, My “story” is not about those things, but about globalization of economy, multi nationals that routinely screw US workers, race to bottom among the states, demise of unions (partly their own fault), advent of winner take all, casino, and crony capitalism, and “capitalism” which concentrates more on making money from money and not on the real economy, and rise of technologies that enable a few of the most highly skilled and educated to make mega bucks, while the rest of us feed them and do their laundry, 🙂 Later.,,, wrap and wine.,

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  2. alex maclachlan

    Irv, I can’t really argue against any of your points because it’s an all of the above kind of FUBAR. It’s more that I try to interject a blue collar perspective on all these Ivy league created compassion policies that play out in negative consequence Federal policies, many of which you listed. When these policies are designed to pick a winner and everyone other than that chosen winner does worse, what’s the point? If the philosophy is a little broader like in home ownership and we threaten the banks with “investigations” if they don’t make home loans in the ghetto and then Wall st exploits and spreads the risk of a terrible policy by making fraudulent packaged investment vehicles to fund it all that implodes the rest of our home values, what’s the point? Conservatives keep saying, leave everyone the hell alone, get out of our businesses, stop trying to legislate fairness, stop overspending by a trillion dollars, stop valuing a two inch fish over millions of livelihoods, stop letting 280 billion gallons of fresh water flow out to sea during a drought and then threaten us if we waste a little water washing our car, stop making college fair and accessible by making it too expensive for most poor kids to access. The list is endless, and I don’t have to sit in a think tank to study what’s unfair because I lived it or had to forgo it because of all these well intentioned policies that had the opposite affect of its intended outcome. It’s maddening to see children without a fraction of the opportunity I had growing up in the 1980’s, being told that the policies of the 1980’s should be stopped at all costs because they aren’t fair to those who won’t take advantage of the opportunities they create. My goodness, the 1970’s were a mess, but we never hear about them. Yes we did have post WWII inflation, but it was mostly real inflation created by growth and the emergence of the baby boom generation. Didn’t Volker have to kill the inflation beast born of government involvement in price controls and an oil embargo? We went two giant steps back in 81-82 right as I graduated high school, only to turn around with a vengeance for roughly 6-8 yrs, then back for a few years in the early 90’s only to boom for 6 yrs in the internet revolution before the bubble burst for a couple years again and then a five year boom from 2002-2007. I take a more macro economic look back now without placing too much blame or giving too much credit because it was a tough slog succeeding no matter who was in the White House or in control of Congress. I have to look at what’s different this time around. You said you thought the problems of not recovering was an economic system gone awry and not government solutions gone awry, but that’s the rub. Economies are supposed to go awry and self correct. Some get hurt by their risk taking or bad luck, others take advantage of great opportunities these dislocations present. Middle class people rise up, some rich people fall down a peg. The manipulating hand of the Fed, Government spending, punishing laws against risk, punishing laws against this and against that in the name of fairness, or whatever, have ground us to an almost halt with no sign of general risk taking or systemic growth anywhere to be seen without the destruction of some other part of the economy to negate any gains. I’m not an economist, I’m not data mining junkie, I just see that at the margins, and the margins are where change and momentum start, there are very few people who are taking calculated risks, because they’ve assessed the risk, and it outweighs the opportunities of gain. Seven years since the last recession and we still FEEL like we are in recession. Why is that and what is different from 9 yrs ago, 14 yrs ago, 19 yrs ago, 28 yrs ago? I don’t think we can talk much about the 1920’s or the 1950’s anymore. Those were some amazing times in our history, almost a moment in time to hold onto. We aren’t even creating moments, and that is very frustrating.

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  3. Michael Nelson

    Hey Irv,

    Michael, brief PAG member. Hope you do not mind my 2 1/2 cents. Things must change, not just from a humanistic or environmental standpoint; but from the standpoint that we cannot sustain this current system. It is interesting to say regulation is freezing the markets, yet the markets and large corporations are doing just fine, for now. Surveys show people do not realize the extent of the large gap in income and the mind-boggling gap in wealth. A gap that the past or present, liberal or conservative system has created (if this is another thing that is Obama’s fault, then he must be the most powerful man to ever walk the Whitehouse lawn and know time travel…I diverge). The current system is not tenable. We are seeing the start. De-regulation, moving production overseas, medical care for profit; all things that have benefited the very wealthy. To say that it is too big to do anything about is exactly what the 1% would like. Our or their system, requires huge consumption, built in obsolescence, using up Earth’s resources, and results in a very stratified society and a very screwed up planet. What legacy do we want? What do we want to pass on to future generations and/or your young relatives? That it is OK for someone to float about in a $390 million dollar yacht; while down the street a little ways, adults and children sleep on sidewalks and wonder what…. if any….. future they have. Today the poor are called the non-taxpaying part of society or the lazy part or happy with their handouts part. Getting my Masters I had to read a book on education, called, “Savage Inequalities”. Wish people who use such words would get to go live in the ghetto and try living on $1200 a month (if you have a family to feed, less if not). Go to a school with no bathrooms, no library, not enough books (other than the bathroom, the rest is true even in middle class districts…but not in private schools). I do not have the answers, but I am looking for possible ones. Thank you Irv for having the guts to speak out on this subject. Most who do are now labeled as wanting class warfare or that they are socialists or that they are drinking the cool-aid of the liberal media (which is owned by the conservative, very, very rich). The breakdown is starting. Most people cannot talk about this without name calling and anger. Studies are showing people are not even associating with others because of political views. Here is a link to a great article about this stratification of society and how Obama’s tactics started to help, but that with the basic shutdown of government, now things are back on the downward spiral. The rich just want the poor to quit asking for $$$ or help. They call them austerity programs. Let corporations go bankrupt and take away pensions. Privatize Social Security, so then the 1% would have their hands on even more money. Be a hedge fund manager and make hundreds of millions a year or be a Dr. trying to cure Ebola and make $100K. We need to wake-up…we have been brainwashed into believing in the religion of money.

    http://www.huffingtonpost.com/dave-johnson/three-charts-to-email-to_b_5664699.html?ncid=txtlnkusaolp00000592

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    1. Irv Lefberg Post author

      Thanks very much, Mike, for youir comments. I think for most of the history of post agrarian America, it has been very American to be concerned about excessive concentration of wealth and inequality and mobility. Those concerns have been motivated by fairness and justice, but even more by practical concerns about the stablity of the country and health of the overall economy. This tradition goes back to even before the Teddy Roosvelt era, The principles about getting to keep the fruits of your labor, made a lot of sense when most of Americans were farmers. All of that started to break down with industrialization, when fewer and fewer of us could work for ourselves or have control over how much we benefited from our smarts and hard work. Good to hear from you, Mike,,, Irv

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    2. Alex MacLachlan

      I think our different perspectives is indicative of differing political philosophies. Conservatives generally consider regulatory overreach as a disincentive to the individual entrepreneur not to the whole markets ability to do fine. We would usually look at whether a government action makes it more or less likely for a capable but poor person to rise from poverty. Pointing to a stock market rising is completely missing the point. Medical care for profit has created the most dynamic pharmaceutical and biotechnology industries in the World with medical professionals attempting to do much better than 100k well by potentially doing good for millions of people. I’d rather have scientists conferring with each other during a deadly out break than politicians conferring to see how they can blame the other side while people die

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    1. Irv Lefberg Post author

      Thanks, Rosemary. I tried to write somthing that was understandable and which people could relate to….perhaps at expense of understating the problems, But I think this was a good trade off, Irv

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