Skip to comments.Income Inequality and the Death of Trickledown
Posted on 12/31/2012 8:25:40 AM PST by ksen
On September 12, 2012, the Census issued its report on Income, Poverty, and Healthcare Coverage in the United States: 2011. While the full report has some nice charts, one that was conspicuously missing was on income inequality. The data for such a chart was in the tables, and so I was able to construct the chart above from them. Mean household (not individual) income for each quintile (20%) is expressed in real (inflation-adjusted) dollars.
One feature that jumps out at you are how relatively flat mean income has been for the bottom 80% over the last 45 years and how much it has grown for the top 20%, from an already high baseline. I thought this merited some further investigation.
If you look at the far left, in 1967, the income difference between the quintiles of the bottom 80% was remarkably similar, less than $17,000 between each group ($16,679 between the 1st (lowest quintile) and 2nd; $15,572 between the 2nd and 3rd; and $16,631 between the 3rd and 4th). But even in 1967, we see significant income disparity ($46,619) between the 4th and 5th (top) quintile. The top 20% have an income difference nearly 3 times as great as the other quintiles.
In the succeeding decades, difference between the 4 lower quintiles showed some moderate spreading. For 2011, they are $17,965 from 1st to 2nd; $20,638 from 2nd to 3rd; $30,238 from 3rd to 4th; and $97,940 from 4th to highest 5th). What we see in this is a movement of the top 20% from around 3 times the initial 1967 spreads between quintiles (~$17,000) to something over 5 times them ($97,940).
What is interesting is that the mean income of the top 20% increased $73,100 from 1967 to 2011. About $20,000 of this increase occurred during the Reagan years, but what often gets overlooked is that about $43,000 of it happened during the Clinton years.
Because the first 4 quintiles are so flat, it is worthwhile to look at their averages over the 45 years of data.
For the bottom 20%, their average mean income was $11,618. For the second 20%, it was $29,425. For the third 20%, it was $48,938. For the fourth 20%, it was $74,183. For the highest fifth 20%, it was $146,693.
Now compare these to the 2011 mean income numbers.
For the bottom 20%, it was $11,239. For the second 20%, it was $29,204. For the third 20%, it was $49,842. For the fourth 20%, it was $80,080. For the highest fifth 20%, it was $178,020.
The lowest 40% are essentially unchanged, actually slightly worse, than their 45 year average. The middle 20% is also not much changed, but slightly better than its average. The fourth quintile is doing modestly better, about a $6,000 increase. The highest 20% is doing about $31,000 better than its average.
You can see this effect in the chart where dramatic rises in the income of the top 20% are reflected in smaller and smaller rises as we go down from one quintile to the next until we arrive at the bottom 20% where there is almost no change at all.
If you think about it, this chart completely refutes trickledown economics. As I said, the periods of greatest income growth in the top 20% correspond to the Reagan and Clinton Administrations. But what we see is that great increases in income at the top have only modest effects on the incomes of the nearest quintiles and have almost no effect at all on the lowest quintiles. That is very little trickles down, and almost nothing trickles down to the bottom.
The chart shows in easy accessible terms much of what we already knew. Wages have been flat for most of us our whole working lives even as the rich have been making out like bandits. But it also shows that theory so near and dear to neoliberals: trickledown aka supply side economics aka Reaganomics aka job creators doesnt work, has never worked.
Please sit down and have a twinkie or a Ho Ho, you have some catching up to do. Where to begin...how about on the West coast. How much did that west coast dock strike cost before it ended? Did you enjoy the shows in Michigan or Wisconsin?
Unions inject a third party and an increased level of hostility between various groups that they then negotiate. Today they are needed only in extreme situations, in my opinion, and cost more than any good they do. Looks like extortion most of the time, in my opinion.
It works for them, though, and they have great political power and usually get favorable treatment from the legal system as long as they don't go too far.
If I were wanting to start a company, I'd do all I could to avoid dealing with them.
And I'd have to lawyer up, not just to deal with the alphabet agencies' regulations, especially just finding a place to build, but also for handling the various law suits. Ask Toyota about that.
And, thanks to obamacare, everything just got much more expensive, so I'd be very reluctant to hire anyone or grow very much.
In fact, thanks to that ever growing debt and GovCo.'s unwillingness to stop spending, I am worried that I will regret hiring anyone new. If I ran a business the way they are running GovCo, I'd be out of business. I am worried about how this is going to catch up to us.
And here we are, the eye of the storm and the back wall is coming. The second term should be a hoot. Like the wabbit said, "Well, batten them down again! We'll teach those hatches!"
People usually act in their own best interests, usually to gain pleasure and avoid pain. It rarely gets more complicated than that. If things are as bad as you say they are elsewhere as compared to here, then we wouldn't be having this conversation. But either way, why do we want to make things so hard and so expensive?
He said he was going to nationalize healthcare, education and energy. Look out below....here we come....
Just who are you calling rich? Anyone who owns a mom and pop business is rich? The guy with the gas station? Or any of those businesses around town, those are rich people? The guy with a Subway shop is rich? The electrician or the heating and air guy who wants to add a crew and grow, they are rich?
I think they all would like to be and they all would spread a lot of wealth around getting there, but most aren't close to rich.
Makes me wonder, where does all the hostility to ambition, to working hard and getting ahead come from? Have we so demonized the old work ethic that got us this far? We really do have a bad attitude to go with our sense of entitlement and our enhanced self esteem.
Yet another reason to avoid starting a business here.
Voting Democrat does nothing for the first, and worsens the second two.
Naked Capitlism is run by a woman using the phony name Yves Smith (a take-off on Adam Smith, even though Adam Smith favored free markets). She is extremely left-wing and hates capitalism with a passion.
Income equality is the result of rising number of unmarried females, partly from welfare expansion and partly from cultural trends. It also partly from the fact more people can live alone that had to live with someone else. Older people, for example. Incomes are down on the lower end because of uncontrolled immigraiton.
Also, when more and more families are on welfare or depending on earned income tax credits, they never enter the workforce and are never able to advance their incomes overo the years. Thus, the become dead-enders, bringing down the average because they are lazy and contribute nothing of value to society. Indeed they bring down society.
Finally, uncontrolled immigraiton plus illegal immigration has been brinking millions of people with low IQ and limited ambition. They may work hard, but they’re going to bring down the average incomes. More peasants from Latin America equals more income inequality.
Look at California. They have the highest poverty rate in America now. Their high welfare payments attrack the worst of the lot from around the nation and the Western Hemisphere for that matter. If you want income inequality — follow California’s lead.
I did read about Wisconsin and Michigan but they didn’t make a strong impression on me because 1) I didn’t follow them in as much detail as other Freepers. I wish I had more time to dedicate to reading the news but I don’t. 2) What I did manage to read still doesn’t compare to the US in the 1960s or what I have seen in other countries, either in frequency or intensity. Michigan and Wisconsin made headline news because they were rare; in countries like Italy and Argentina where these types of strikes actually are common nobody bothers to report most of them because they’re not considered newsworthy.
There’s quite a difference between public sector unions and private sector unions: namely, public sector unions’ employers have the capacity to tax. So, public sector union bosses reason, why shouldn’t we make outrageous demands? After all, the government can’t go out of business. That’s why I agree that public sector unions like those of teachers and prison guards are out of control and have to be reined in. Private sector unions, on the other hand, know their employers cannot simply raise revenue with the stroke of a pen, thus it is in their self-interest to moderate their behavior lest they kill the goose that lays the golden eggs.
In a perfect world there would be no unions, each worker could negotiate his/her salary with boss individually, and salaries would accurately reflect the value of the worker’s labor to the company. We don’t live in a perfect world. The playing field is not level. For instance, CEOs of America’s biggest 350 companies earned 231 times what the average private sector worker did in 2011 (Source: http://www.economist.com/blogs/graphicdetail/2012/05/ratio-ceo-worker-compensation) I find it hard to believe the CEO’s labor is really worth 231 times that of the workers who are actually making the widget. Part of the definition of being a leader of any kind is that you have more power over your subordinates than they have over you. Theoretically, of course, a top-performing worker who feels he/she is being underpaid can leave for another job but if all the company’s competitors are also paying their workers less than the value than value of their labor (and they will be because it’s in their self-interest to maximize their own profits) where exactly is he/she going to go? The idea that the non-rich have the same opportunities as the rich is idealism to the point of utopianism. First you’d have to get rid of the natural human instinct of rich parents to provide the best for their children, e.g. a host of SAT tutors that poor parents couldn’t begin to afford, a job in management in whatever corporation he/she owns regardless if the kid is qualified or not, etc.
You mentioned self-interest as the primary motivation for human behavior. Okay, so let’s talk about self-interest. Right now the GOPe is telling me to put my trust in so-called “job creators”, who have a self-interested incentive in hiring as few workers as possible and paying the workers they do have as little as possible, to increase employment and get us out of the recession. That doesn’t make sense to me. Relying on self-interest alone is not going to get us out of this. For example, another poster mentioned that rich are hoarding their cash (as are plenty of non-rich) because it is in their self-interest, which is true. Yet if everyone does this, the economy will remain mired in a recession because our economy is so dependent on consumer spending. So sometimes the aggregate of all self-interested decisions actually leads to everyone being worse off, rather than better off. I’m not saying Adam Smith was wrong, just that his theory of the invisible hand doesn’t work in every circumstance.
“Just who are you calling rich? Anyone who owns a mom and pop business is rich? The guy with the gas station? Or any of those businesses around town, those are rich people? The guy with a Subway shop is rich? The electrician or the heating and air guy who wants to add a crew and grow, they are rich?”
Nope, those people are middle class, upper middle class at best, and are being crowded out by their larger competitors every day. I’m all for small business; the problem is when the government cuts taxes most of the tax cuts go to the owners and CEOs of large businesses who need the tax cuts far less, who are putting the aforementioned small businesses out of business, and who, coincidentally I am sure, contribute far more to politicians’ campaigns than small businesses do.
“Makes me wonder, where does all the hostility to ambition, to working hard and getting ahead come from? Have we so demonized the old work ethic that got us this far? We really do have a bad attitude to go with our sense of entitlement and our enhanced self esteem”
I’m not hostile to the value of hard work; I’ve just lost faith that hard work alone gets you anywhere unless you were born into one of the “elite” families, attended the “right” schools, and moved in the “right” social circles. Of course, all else being equal, a person who works hard will do better than one who slacks off. Sadly, in the real world all other things are not equal, and a person’s economic success is determined more by the circumstances he/she was born into than by how hard he/she works. If Paris Hilton had been born into a poor family she would been just another common tart. Instead, because she is a member of the elite class, she is fawned over as a celebrity and leads a far easier life than those small business owners you mentioned who actually have to work for a living, all without producing anything of value. Meanwhile, small business owners all across America, who have poured their blood, sweat, and tears into their businesses, have seen their businesses fail and continue to slip closer to poverty. The American dream is dead and both parties killed it.
That's why I suggested you have a Twinkie...at least as long as you can, if you can still find one. One of the unions put that company out of business, in this economy!
Check out the airlines' history of troubles with the unions. I understand it's not just the unions' fault. I have seen and experiences multiple management fiascoes in multiple companies and been through more than a few corporate takeover aftermaths. But as a general rule, unions just add to the problem, and do not add to the solution. I like working in non-union places MUCH better.
You might also enjoy reading the history of union activity in the US, during times of war, and not just times of peace. Generally, union teachers won't teach you about the full history of unions, only the good stuff.
What you saw in Madison and in Michigan was just a taste of what they are all capable of, good times or bad. I've also heard that violence done by union members while they are protesting is OK legally, but I need to look into that more to be sure. Didn't surprise me, though. The history supports legal favoritism toward them like that.
For most of my working life, I have been a factory worker in various industries, high and low tech, some using my brain, most no brain required beyond basic skills. The better I made myself, the better jobs I've been able to get.
I read a lot of hostility and frustration, class warfare stuff in your post. Personally, I never go there and refuse to let myself do that to my attitude. It's poison. It's the dark side. If once you start down the dark path, forever will it dominate your destiny. Feel free to add your own Yoda quotes.
This is what I know. My risk and contribution to that company's success justified the wage I made. I was not bothered or jealous of the salaries the CEO, Pres. VPs or what anyone else made, nor did I view their salaries as a threat to mine. I truly had no comprehension of what they did to earn it and what effect their work had on the success of failure of the company.
If they ran it into the ground, it was their business, not mine, even though I would suffer their loss along with them. If they somehow were successful, then good for them and for me, since the better they were, the better they did, the better I did, as I worked more hours and got better raises. Therefore, I wanted the highest paid management possible if that meant they were the best for the job. I only care about their merit, not their money.
For the work and the opportunity I was grateful. Unlike with talented management, almost anyone with similar skills could have done my job, so I tried to be a bit better and help make things run smoothly. Still got laid off, but was always hired back. Such is life.
You determine your success and your failure. No one else. You may be helped or hurt by those around you, but in the end, you are the one in charge. It sucks that the government types play class warfare games and divisively pit us against each other, but you don't have to let your self fall for it.
It may be harder now or not, don't know. It's always hard. Start from that point of view and it actually gets easier. Start with the idea that your success is in someone else's hands or in fate's hands and you'll struggle with attitude problems that will sabotage you and your efforts and prove that belief for you the rest of your life.
It doesn't matter where you start in this race, all that matters is how you run it. Some of us start well back of the starting line and still finish well. Read the biographies of the successful and you'll see what I mean. They generally live the secret to the success you speak of.
Each of us have a million dollar idea, but most of us never recognize it or do anything with it. It's doable, if you want it bad enough. I simply hate the ones who make the path so much harder than it is already. Most of us aren't Paris Hilton and are grateful to God for that fact. She doesn't look all that happy anyway.
Apologies for going on and on for soooooo long...others say this stuff so much better than I do. Listen to Freewill by Rush to see what I mean.
Okay, now I understand the Twinkie reference. I never said private sector unions were guaranteed to calculate accurately how far they could push the line; miscalculations can and do happen, as the Twinkies clearly show. All I said was that private sector unions have an incentive to moderate their demands that public sector unions don’t, which is why I don’t consider the former to be as big of a threat as the latter. The union for Twinkie laborers has now put itself out of business as well, thus eliminating itself as a political force, and for every Twinkie-type bankruptcy there are dozens of unionized companies who are surviving this recession because their unions know better.
I’ve Googled the topic using several different search requests, looked at pro-union websites, anti-union websites, and neutral websites, and I can’t find anything that says unions are legally permitted to use violence during protests.
If you’ve worked your way up to a better job than the one you started with, then I’m happy for you. Just please understand that a) not everyone who is willing to work can find a job and b) not everyone is as fortunate as you in terms of hard work leading to promotion.
“I read a lot of hostility and frustration, class warfare stuff in your post. Personally, I never go there and refuse to let myself do that to my attitude. It’s poison. It’s the dark side. If once you start down the dark path, forever will it dominate your destiny. Feel free to add your own Yoda quotes.”
I don’t consider myself a socialist or a class warfare advocate, just a realist who sees the world as it is rather than how I would like it to be. I simply haven’t seen any evidence that the world works as you seem to think it does, where hard work by itself ensures success. I have seen people who have worked hard their whole lives who are still not getting ahead and I have dated a guy who has skated by on his parents’ money and connections, without having any particular work ethic of his own, yet he has more money than they will ever have. My ex, by the way, is a die-hard Democrat. Don’t ask me how he squares that with his self-interest as an affluent Jew.
I’ll admit it irks me that a pro-abortion atheist (http://www.aynrand.org/site/PageServer?pagename=objectivism_faq#obj_q5) is considered the be-all and end-all of conservatism by some on this forum but that is a topic for another thread. If I am pessimistic about economic issues it is for 1 reason: I am in my early 20s. That is to say, I will still be here when the fecal matter really hits the ventilation device and makes our current crisis look like a walk in the park. Not to play the generational warfare card but my generation is the one that’s going to have to pick up the tab of this deficit, and that includes the tax cuts for the rich, which are not being translated into jobs for people my age, not even for those with a decent work ethic. There are 3 ways we can deal with the deficit while cutting taxes for the rich: 1) Cut spending by a considerable margin 2) Raise taxes on the non-rich or 3) Ignore the deficit and keep pretending everything’s fine. Option 1 is not going to happen anytime soon, not unless there is a complete overhaul of the leadership of both parties and all politicians channeling federal money to their pet projects are thrown out of office simultaneously. What are the odds of that happening? Option 2 would raise taxes on those whose financial resources are already stretched to the breaking point from the recession, and could very well spark a French Revolution-style uprising, maybe not now, but 10-20 years down the road. I’m pretty sure neither of us wants that for our country. Option 3, which seems to be the one favored by our esteemed GOPe leaders, would saddle the younger generation with an even larger tab than we have already. The time to cut taxes is not during a multitrillion dollar deficit.
“If they ran it into the ground, it was their business, not mine, even though I would suffer their loss along with them. If they somehow were successful, then good for them and for me, since the better they were, the better they did, the better I did, as I worked more hours and got better raises.”
I’m glad that was your experience but in many corporate situations if the company does poorly the workers lose their jobs while the CEOs and other senior executives take the golden parachute out and retire in style. The old notion of a captain going down with his ship appears to be a foreign concept to them. Whereas if the company does well, that doesn’t always translate into better wages for the workers.
Put it this way: I may be in the driver’s seat and I may be the one who decides which fork in the road to take but I didn’t choose which road I started out on. Some people start off on well-paved roads, others start on potholed dirt roads. So while I can choose to choose wisely or unwisely at every fork in the road, I can’t get somewhere if there’s no road from where I am to where it is. Most conservatives say that an individual’s success or failure depends entirely on that individual’s merit and most liberals say that an individual’s success or failure depends entirely on luck or fate. I don’t believe the world is that black-and-white; I believe that the roots of an individual’s economic success are more complex than either side acknowledges, a middle ground that is based partially on merit and partially on chance.
One thing I have noticed about successful people is that their ideas are much more likely to come to fruition during economic booms than during recessions for obvious reasons. I’ve also noticed that most successful people are American, Canadian, or from a small handful of countries in Europe and Asia. This is not because the Sudanese and the Malaysians, to give a few examples, don’t also have brilliant ideas but because their governments are too unstable or too corrupt to allow those ideas to flourish into successful businesses. In a sense you and I have already won the lottery simply by being born in the US as opposed to a third world country. Which goes back to what I was saying about the complexity of individual success and failure: a Malaysian can be intelligent, thrifty, and hard working and yet reap much poorer fruits of his labors than if that same man had been born in the US. Similarly, if a rich American kid and poor American kid have the exact same intelligence, business acumen, ability level, work ethic, etc. the rich kid will generally do better than the poor kid because he/she has more opportunities to develop his/her gifts. The rich kid will go to a decent private school while the poor kid will go to an extremely low quality public school, the rich kid’s parents will use their connections to help him/her network while the poor kid will have to build his/her own network from scratch, the rich kid will have more time to study while the poor kid will have to work to supplement the family income, etc. I could go on but the bottom line is Same Merits + Different Circumstances= Different Results.
I don’t know if Paris Hilton is happy either but I do know that she is materially better off than many who actually work for a living, and that that violates every principle of the American dream.
No need to apologize for the length of your post, especially given the length of my own posts. You want to make sure you’re addressing all my concerns, and I respect that.
She's not the best example, more of an exception to the rule or a likely by product of following it. But she's also yet another example of "the boss's kid" and they have always been around. In fact, if you see the company is structured around the Boss and Kid(s), you might not want to play there unless the family is committed to the ideals that made the business possible and made it grow.
Those boss's kids situations can be the worst possible when found in the corporate world and in my experience have been the worst offenders of the Golden Parachute escape plan when the kid(s) run it into the ground.
Anyway, I tend to agree with your post. I can only say that the last decade has been rougher than any before it. I do apologize for the length of my response. I think I wrote that to myself for my own re-motivation more than to you.
I'm trying to reinvent myself again for this new obamanation we find ourselves in and am frustrated and worried by how much more difficult things have become. We have the blueprint for a successful nation and we are determined not to use it again.
My objections are always against anything that goes against the underlying natural rules that govern the world and against things that favor one group over another for reasons other than merit, as most social systems often do. That is the beauty of the Constitution. It sets up a representative government in harmony with natural law and with built-in resistance to other social systems/influences that are counter to those laws.
Unfortunately, not one generation (Lincoln might be an exception) has been able to live up to our founding ideals, but have instead lived down to the lowest levels of human nature. The progressives and all their various supporting agencies are the worst offenders, starting with Teddy R. and especially with Wilson, and here we are, a floundering Great Society.
My fondest hope and prayer is that our generation be the generation who actually holds up those founding ideals so eloquently expressed in all of our founding documents once again and strives to live up to that high standard.
I want to live, work and play, succeed or fail, in that world!!! I want to believe we all do and am disappointed to see that isn't the case.
wealthy that create jobs but consumers
No “consumer” (a weird abstraction because businesses are consumers too) has ever created a job. Jobs are created by people with money who hire people to perform tasks. That’s what a job is - when someone is hired to perform a task. When you take money away from people looking to hire they can’t hire people. When you take money away from people who can most effectively invest that capital you get less investment. It’s simple logic.
The problem with the graph is inflation and monetary policy and the lack of a true free market economy in which inefficient producers are weeded out and costs come down making real wages go up.
Without customers the best idea in the world will fail.
And if there are not enough people with disposable income to purchase the item/service being produced then the person with money isn't going to waste time hiring anyone. When income gets overly concentrated at the top you necessarily have less than optimum spending going on in the economy by virtue of the marginal propensity to consume.
Or more realistically the item’s cost structure prevents the item from being sold profitably at a market clearing price. Cost structures are in the modern world largely set by government interference in the market by things like the minimum wage which sets labor costs at an above market rate and makes it difficult to find profitable market clearing prices.
How is your scenario more realistic than mine? I’m p. sure Henry Ford was right.
Because it reflects actual human behavior rather than self serving theory or urban legends. Putting aside things like demand inelasticity, lowering prices induces sales and reduces inventory but only if it can be done profitably. Note that much of this began after the Democrats raised the minimum wage after 2006. Government intereference by recklessly expanding credit, raising wages above market rates, destroying savings with inflation, and subsidizing poorly run businesses does noting but destroy an economy.
I'm among the first to agree with your experience, but am saddened that you haven't had reason to agree with mine. I guess that's why I can also understand why people would go elsewhere to start a business.
It wasn't always like this and we weren't always like we are now. We are cleaner now and more aware of our contributions to the environment, but elsewhere we've devolved and dumbed down while making promises and creating social systems to support our decline, thus accelerating it. We've made it too over regulated, too "socialized" and fair, politicized, etc. and are growing more so.
I still think the best plan is to find an island of sanity in an insane world and get back to being really good at helping others get what they want. This has always worked well as my secret to success.
I have a lot of experience in several fields and am good at learning new skills. Now that I'm finally back on my feet and have more or less shook it off, I'd like to start something of my own, only to have a second term of the obamanation to deal with.
Oh well, what can you do? Back to battening down the hatches around here and watching the weather, hoping the winter's not too bad and we get an early spring, so to speak. I've got things to do and I know that there are a lot of others here in the country like me who are ready, willing and able to get back to it once conditions are better and the chances of success aren't so stacked against us.
So, what this chart is really showing is that the baby-boomers have progressed to the top of their pay scales as they near retirement?
Would that mean that the chart will start to go down again as the boomers leave the job market, and those behind them find fewer jobs with lower pay limits?
And people focusing on income "inequality" also forget that the birth rate of Americans from the two poorest segments of the populations, Blacks and Hispanics, has risen faster than the population of White Americans. Blacks and Hispanics are the groups least likely to get decent educations and advance to the middle class and beyond. That Black and Hispanic population growth and refusal to progress at the same rate compared to the White population drags down the average.
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