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
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 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.
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.
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.