That the rich get richer and the poor get poorer. At least, that is what most people believe.

That cliché is not quite accurate. The data on this subject, as detailed by the CBO and reflected in the charts below, reveals that over the past three decades, the poor got a little bit richer, the rich got a lot richer, and the most rich got phenomenally richer.

That may not fit on a bumper sticker, but it is the simple fact.

We learn these details from a newly released report on real (inflation-adjusted) average household income in the United States from the non-partisan Congressional Budget Office, titled Trends in the Distribution of Household Income Between 1979 and 2007.

The rich got richer — almost three times as rich — over that time period:

For the 1 percent of the population with the highest income, average real after-tax household income grew by 275 percent between 1979 and 2007 (see Summary Figure 1).

>

>

The very rich — the top 1% — captured the lionshare of the growth of total market income:

As a result of that uneven growth, the share of total market income received by the top 1 percent of the population more than doubled between 1979 and 2007, growing from about 10 percent to more than 20 percent. Without that growth at the top of the distribution, income inequality still would have increased, but not by nearly as much. The precise reasons for the rapid growth in income at the top are not well understood, though researchers have offered several potential rationales, including technical innovations that have changed the labor market for superstars (such as actors, athletes, and musicians), changes in the governance and structure of executive compensation, increases in firms’ size and complexity, and the increasing scale of financial-sector activities.

>

>

And as we showed the other day (see Forget the top 1% — Look at the top 0.1% and PPT presentation), the income inequality was skewed to an even greater degree amongst that top 1% — the top 0.1% and the much wealthier 0.01% is where all the big bucks are.

This matters a great deal — but not for the silly political reasons you have been led to think. No, its not about class warfare. No, its not about redistributing the wealth.

The reason this matters is quite simple: Healthy societies have modest, but not extreme wealth and income inequalities. There are inequalities because not everyone has the same skills and capabilities, and some inequality in wealth and income provides an incentive system.

However, massive, widely disparate economic inequality has historically led to bad — and in some cases, extremely bad — outcomes. It contributes to social unrest, excessive political populism, and mob violence.

I write this as someone who, due to a fortuitous combination of luck and work, developed a skill set that is highly valued by modern society. This is in part to an accident of birth, to have an excellent education, to some serendipity. Overcoming some adversity didn’t hurt; figuring out how to turn some deficits to an advantage was hugely beneficial. Thus, I find myself in that top 1% economically; but I know deep down in my soul that if I was born 100 years earlier — and maybe even 30 years earlier — I would not have been. This makes me acutely aware of the risks and dangers of our current wide disparity of wealth and income.

Healthy societies allow their citizens to have a realistic chance at fulfilling their potential. This is done through a combination of economic freedom, enforcement of laws and contracts, legitimate democratic elections, basic education for its citizens, tax fairness, regulatory oversight of influential corporations an other entities, and the institutional value of protecting individual liberty.

Where is the United States falling short?

~~~

Summary of CBO paper after the jump; full paper here.

~~~~~~~~~~~~~~~~~

Increased Concentration of Market Income

The major reason for the growing unevenness in the distribution of after-tax income was an increase in the concentration of market income (income measured before government transfers and taxes) in favor of higher income households; that is, such households’ share of market income was greater in 2007 than in 1979. Specifically, over that period, the highest income quintile’s share of market income increased from 50 percent to 60 percent (see Summary Figure 2). The share of market income for every other quintile declined. (Each quintile contains one-fifth of the population, ranked by adjusted household income.) In fact, the distribution of market income became more unequal almost continuously between 1979 and 2007 except during the recessions in 1990–1991 and 2001.

Two factors accounted for the changing distribution of market income. One was an increase in the concentration of each source of market income, which consists of labor income (such as cash wages and salaries and employer paid health insurance premiums), business income, capital gains, capital income, and other income. All of those sources of market income were less evenly distributed in 2007 than they were in 1979.

The other factor leading to an increased concentration of market income was a shift in the composition of that income. Labor income has been more evenly distributed than capital and business income, and both capital income and business income have been more evenly distributed than capital gains. Between 1979 and 2007, the share of income coming from capital gains and business income increased, while the share coming from labor income and capital income decreased.

Those two factors were responsible in varying degrees for the increase in income concentration over different portions of the 1979–2007 period. In the early years of the period, market income concentration increased almost exclusively as a result of an increasing concentration of separate income sources. The increased concentration of labor income alone accounted for more than 90 percent of the increase in the concentration of market income in those years. In the middle years of the period, an increase in the concentration within each income source accounted for about one-half of the overall increase in market income concentration; a shift to more concentrated sources explains the other half. In the later years, an increase in the share of total income from more highly concentrated sources, in this case capital gains, accounted for about four-fifths of the total increase in concentration. Over the 1979–2007 period as a whole, an increasing concentration of each source of market income was the more significant factor, accounting for four-fifths of the increase in market income concentration.

Income at the Very Top of the Distribution

The rapid growth in average real household market income for the 1 percent of the population with the highest income was a major factor contributing to the growing inequality in the distribution of household income between 1979 and 2007. Average real household market income for the highest income group nearly tripled over that period, whereas market income increased by about 19 percent for a household at the midpoint of the income distribution. As a result of that uneven growth, the share of total market income received by the top 1 percent of the population more than doubled between 1979 and 2007, growing from about 10 percent to more than 20 percent. Without that growth at the top of the distribution, income inequality still would have increased, but not by nearly as much. The precise reasons for the rapid growth in income at the top are not well understood, though researchers have offered several potential rationales, including technical innovations that have changed the labor market for superstars (such as actors, athletes, and musicians), changes in the governance and structure of executive compensation, increases in firms’ size and complexity, and the increasing scale of financial-sector activities.
The composition of income for the 1 percent of the population with the highest income changed significantly from 1979 to 2007, as the shares from labor and business income increased and the share of income represented by capital income decreased. That pattern is consistent with a longer-term trend: Over the entire 20th century, labor income has become a larger share of income for high income taxpayers, while capital income has declined as a share of their income.

Increased Concentration of After-Tax Income

As a result of those changes, the share of household income after transfers and federal taxes going to the highest income quintile grew from 43 percent in 1979 to 53 percent in 2007 (see Summary Figure 3). The share of after-tax household income for the 1 percent of the population with the highest income more than doubled, climbing from nearly 8 percent in 1979 to 17 percent in 2007. The population in the lowest income quintile received about 7 percent of after-tax income in 1979; by 2007, their share of after-tax income had fallen to about 5 percent. The middle three income quintiles all saw their shares of after-tax income decline by 2 to 3 percentage points between 1979 and 2007.


~~~

Source:
Congress Of The United States congressional Budget Office
Trends in the Distribution of Household Income Between 1979 and 2007
October 2011

Hat tip Neatorama, October 26, 2011

Category: Data Analysis, Economy, Employment, Wages & Income

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

63 Responses to “Who Is Getting Richer ? Poorer? A LOT Richer?”

  1. Petey Wheatstraw says:

    “Where is the United States falling short?”
    _________

    Policy, of course. All that changed in this period was policy.

    The middle class voted to do away with the policies that kept the wealthy and powerful from disenfranchising them, and voilà, they were disenfranchised.

    No big mystery.

  2. For perspective, a look at the wealthy around the world: http://bit.ly/su6mAR

  3. viewwin says:

    Correct me if I am wrong, but back in 1979 most only had one person working to provide income for the family. An interesting thing would be to look at household hours worked for adjusted income on a per hour basis.

    ~~~

    BR: The two income family began expanding long before 1979 . . .

  4. Apinak says:

    Remember that during this period the middle class is going from one wage earner to two and working more hours. This is driving the small increases in household income for the poor and middle class.

  5. wally says:

    “Healthy societies allow their citizens to have a realistic chance at fulfilling their potential.”

    Beyond that, you also cannot allow a limited group to get a monopoly on resources because that then stifles progress and response to change. That’s why every species of plant and animals programs its individuals to die; if that were not so, the species itself would die. Because conditions change, turnover is necessary for survival.

  6. Going to 2 incomes does not explain how the top 10% top 1% and the top 0.1% captured a greater and great piece of the pie

  7. jhylen says:

    How much of this is due to technology?

    As the large internet-based utilities rise, it strips out workers that used to do things like staff retail locations (e.g., Borders), and concentrates wealth in the techno-elite (workers at Amazon, Google, Apple, Facebook).

  8. [...] A look at the income distribution over time.  (Big Picture) [...]

  9. gman says:

    This situation calls for eliminating the capital gains tax and taxes on dividends!?!?

  10. Petey Wheatstraw says:

    BR;

    re: 2 wage-earner families:

    I think what the comments, above, are pointing out, is that the discrepancy is even greater if one considers that it takes the full wage-earning capacity of the average family just to stay even (not to mention employer demands for greater and greater productivity and the loss of what were considered standard perks and benes in the mid-20th century).

  11. Long term says:

    Here are a few reasons for the rise of income inequality:

    * Our Information Age. Marketplace room for one Microsoft, one Oracle, one Facebook, etc. Whoever comes in second does not make much money.

    * Our Information Age II. The very rich can easily now have Indians do the work. The middle class does not have this avenue of arbitrage.

    * Financial Engineering. A very elite subset of bright and well-connected individuals has engineered vast sums for themselves over the last 20 years. The middle class do not get to engineer money.

    * Erosion of Money. The middle class have their money in money (or housing), which has and will lose value. The rich have their money in assets which simply rise alongside inflation.

    * Bad Boards of Directors. Once CEO’s captured corporations, rewards at the top became out of control.

    * Greenspan. Always bailing out the rich out became common practice. The rich took notice and the middle class did not.

    There are many other reasons for income iequality as well but I feel that policy is less the reason than the natural forces of the Information Age and Globalization. The door for rapid wealth growth was open to the masses and the very bright and hard working walked in. The next question is how we deal with the reality of income inequality at a policy level.

  12. Seaton says:

    “…The reason this matters is quite simple: Healthy societies have modest, but not extreme wealth and income inequalities. There are inequalities because not everyone has the same skills and capabilities, and some inequality in wealth and income provides an incentive system.

    However, massive, widely disparate economic inequality has historically led to bad — and in some cases, extremely bad — outcomes. It contributes to social unrest, excessive political populism, and mob violence.”

    Well-said—I spoke nowhere near as articulately this same thing last monday at lunch with an “oilman”, & his only response was that he had guns, police would tend to the rest.

    What did Marie Antoinette say prior to guilliotining? (sp?) I’m convinced the wealthiest with no regard to how much they can lose is a bigger issue of “problem”. How to solve, indeed? Elections—I’m not convinced that the Founding Fathers weren’t aware of similar cultures & “civilisations” in the past that had made similar errors.

    One last tidbit: About 1979, America was dealing with ever-increasing shortages of cheap gasoline. (Remember the Iranian Hostages, spikes in home mortgages & %-rates?) I believe it was just prior to then that my favorite gas station was trying to figure out how to install new pumps, instead of labeling the price of fuel being $1.xx—their mechanical-wheeled-meters didn’t go high enough. Now, it looks more like our acceptance of campaign contributions—Red Skelton’s, “best politicians money can buy” (?) comment—is our national undoing.

  13. klhoughton says:

    I dread to think what that last graph would look like without the EITC.

  14. Petey Wheatstraw says:

    Long term:

    If I’m not mistaken, time-and-a-half for overtime (no longer enforced), reclassification of employees as managers or contractors (despite the illegality of that reclassification), the hiring of illegal aliens at sub-legal wages (blatantly illegal), globalization (and related wage arbitrage), failure of the minimum wage to keep up with the cost of living, tax policy, and deregulation (generally, but especially in regards to banks, investments, and the types of chicanery that led to SarbOx — also not enforced), have had a huge impact on the wage disparity in the US.

    “The door for rapid wealth growth was open to the masses and the very bright and hard working walked in.” Does not explain how the lions share of income now goes to the very top.

    The answer is policy.

  15. csainvestor says:

    I have a couple of problems with the data set. These wages in the data set are adjusted for inflation, but do you believe the official government stats on inflation? [BR: What do you suggest using instead?]

    To make matters worse the data ends in 2007. Since 2007, fake cpi inflation has skyrocketed, and MORE importantly, real inflation as shown in Shadow Government Statistics has decimated the middle class. [BR: Prices skyrocketed from 2001-08 -- not after the collapse]

    -Food prices have increased by 4.7% since September 2010

    Medical:
    - medical premiums have increased 113 percent since 2001
    -Annual premiums for a family of four climbed to $15,000 this year.
    -Annual employee contributions now total more $4,100 on average. That’s more than 130 percent higher than back in 2000

    Rent-
    -Effective rents, or what tenants pay after landlord giveaways are included, rose on a year-over-year basis in 81 out of the 82 metropolitan areas tracked by Reis. San Jose, California, led with 5.5 percent growth in effective rents from a year earlier, followed by San Francisco at 4.5 percent and New York at 3.7 percent, Reis said. Las Vegas was the only city where rents fell.
    -Effective rents have climbed 4.1 percent from their recession low in 2009

    -We all know what’s happened to the price of gas- but mass transit increases get less noise in the media. Most major metropolitan mass transit organizations have raised fares by 20% or more since the recession. Almost all, are in the process of raising fares by the same amount or more for a second or third round, the working poor frequently rely on mass transit- the middle class is switching to transit for relief at the pump as well.

    Wages since 2007
    -During the December 2007 to June 2009 recession, median household income adjusted for inflation fell by 3.2 percent, to $53,518.

    -Median income fell at more than double that rate, by another 6.7 percent to $49,909, from June 2009 to this past June.

    Unadjusted for inflation -The median household income was approximately twenty five grand in the mid eighties- currently; the median household income is a tad under fifty thousand.

    Unadjusted for inflation- if you look at median household income from the past- when income equality was fairer, we had a vibrant middle class. When the middle class existed, you will also see that the median wage went up much higher, and much quicker than it does now.

    The top 1% has siphoned off wages that used to trickle down to the middle. So, while it is true that wages have increased since 1979, things haven’t been this bleak since the depression. Unadjusted for inflation, the median wage is a hair less than twenty seven grand, that isn’t enough to live on. 105 million working Americans earn less than 27k a year.

    My opinion- It looks like we need the median wage to be 50% higher than it is now in order to give the middle class a shot at survival. But- Every single republican candidate wants to abolish the minimum wage and cut taxes even further for the rich.

    How we get out of this hole- if we can get out of it, is anyone’s guess.

    ~~~

    BR: Are you suggesting that wealth inequality is even WORSE than the CBO states … ?

  16. Iver says:

    I think two words explain it: Corporate profits

    According to Fortune, in 1979 the profits of the top 100 most profitable US companies was a combined $43.2 billion, or about $116.2 billion in inflation adjusted 2005 US$. By 2005, the profits of the top 100 companies was $417.3 billion, representing a gain of 259%.

    According to the above report, incomes for the top 1% grew 275% from 1979-2007 vs 259% profit growth from 1979-2005. Not a perfect comparison, but close enough to argue that the incomes of the top 1% simply grew right along with corporate profits.

    Profits for the top 100 US companies have grown substantially over the last 30 years. Take Walgreens, the 100th most profitable company in 2005 with $1.36 bln. Adjusted for inflation, this would have put them 22nd in 1979. Look at 1979′s #10 most profitable company – Texaco. Their profits were $852.5 million. Adjusted for inflation, this would be about $2.3 billion in 2005 putting it 59th on the 2005 list.

    And FMC, #100 in 1979 with $140.9 mln? They would be #322 in 2005 with an inflation adjusted $379 mln.

    You want to blame something for rising inequality? Blame corporate profitability.

    Note: I use the 2005 list because was easier to download into Excel during my lunch break.

    You can check my numbers by downloading the Fortune 500 data here (make sure to sort by profits):
    http://money.cnn.com/magazines/fortune/fortune500_archive/profits/1979/
    http://money.cnn.com/magazines/fortune/fortune500_archive/profits/2005/
    http://www.bls.gov/data/inflation_calculator.htm

  17. abUWS says:

    One thing that is interesting that I read is that the disparaties, while there, are actually less than is presented even in this report due to a number of factors not figured in this report.

    For one thing, the average household is much smaller today, particularly amongst the lower quintiles where more of the families are single parent households and where family planning, and to some degree welfare reform, has meant smaller households. So if house holds are smaller then the per capita income is under reported.

    Another factor left out is that inflation for the various quintiles is actually very different. The average income and average housing costs in Manhattan have varied much differently than they have in kansas.

    Second, the statistics used are income statistics, but these don’t account for government programs and the dramatic progressive impact they have had on taxable income.

    ~~~

    BR: You make a series of unsupported challenges to the data, then fail to back up those claims with actual reference or facts. Thats a giant FAIL around these parts,

  18. freejack says:

    “Roughly 94 percent of the people in capitalist America make their living from wage or salary. Only 6 percent are true capitalists in the sense of deriving income from ownership of the means of production…We can win the argument once and for all by simply making more of our people Capitalists.”
    - Ronald Reagan (1975)

    American public policy Since the 1980s has reoriented itself away from a focus on wages and toward a focus on assets.
    Pensions were converted to 401K plans,homeownership incentivize, easy access to credit was granted.

    Low priced foreign-made goods became policy priority.
    Low-cost goods coming into America were helpful in offsetting the impact of wage stagnation and increased the stock value of American companies who were exporting jobs overseas, raising their stocks value.
    Low interest rates also served the policy. Renters and savers suffed in the low-interest rate environment, while borrowers and asset owners did very well.
    Tax cuts, are also helpful in offsetting the impact of wage stagnation.

    America’s middle class eventually grew as dependent on assets as wages.

    And then came ’08 and the Jenga shitpile of assets collapsed.

  19. jib10 says:

    Look at income distribution as the nation got rich post-WWII. Look at what changed between the New Deal economy of the 50′s, 60′s and 70′s and the Reagan Revolution economy from the 80′s till now.

    The New Deal is not responsible for the post-war boom but it is responsible for the distribution of income. It accomplished that, in part, by putting finance in a box. Finance was so restricted that to get rich, you had to build a company or join a corporation and rise to the top. You could not really do it on Wall Street or banking. It also gave middle class and the poor benefits paid for by taxing the rich.

    As an aside, this is exactly what you would expect a democracy to do. There are more poor and middle class than rich so if every one votes their self-interest, the rich will be taxed at a higher rate than others. One of the most bizarre political trends of the last few decade is large numbers of middle class and poor voting to give the rich lower taxes than themselves. Really strange.

    That New Deal was ended with the massive deregulation of finance that started in the 1980s. Now you can make more money trading financial instruments than you can building things. When this happens (and it happens periodically in history), then capitalism stops behaving like Reagan’s capitalism and starts behaving like Marx’s capitalism.

    To fix it, put finance back in its box. Re-instate Glass-Steagall and require all the new investment banks to be partnerships, tax capital gains at the same rate as all other income, eliminate all the deductions and subsidies the tax code provides debt, reduce the leverage ratios back to their pre-80′s level, tie CEO pay to the median pay of workers in their corporation so that the only way for a CEO to get more money is to raise the pay of their own employees.

    Thats a start anyway. The longer it takes to correct the current situation, the more radical the solution will be. And there are a lot more radical solutions than just regulating finance again.

  20. bishophicks says:

    Isn’t more accurate to say that the 1% got almost 4 times as rich. If my income goes up 100%, I’m twice as rich. Up 200% and I’m 3 times as rich. Up 275% and I’m almost 4 times as rich.

    ~~~

    BR: I think you are correct!

  21. jack says:

    pethokoukis has some interesting points on this report:
    http://blog.american.com/2011/10/7-reasons-why-obama-is-wrong-on-income-inequality/

    including this observation:

    7. And why did the top 1 percent do particularly well? One potential explanation from CBO: ”The compensation of ‘superstars’ (such as actors, athletes, and musicians) may be especially sensitive to technological changes. Unique characteristics of that labor market mean that technical innovations, such as cheap mass media, have made it possible for entertainers to reach much wider audiences. That increased exposure, in turn, has led to a manyfold increase in income for such people.”

    ~~~

    BR: Pethokoukis thinks income inequality is a myth.
    Fail.

  22. cbatchelor says:

    Meanwhile…
    “…if we look at the bottom third of the labor force, which if you take into account the entire households involved–we’re talking about 100 million people–households approximately below $40,000 a year, at this time in the middle of 2010, when the national unemployment rate was about 9.8-9.9 percent, in that bottom third of the labor force, the unemployment rate is 18 percent. If you then add on involuntary part-time work and discouraged workers, it raises to 35 percent….” -JEFFRY FRIEDEN, Harvard University; October 14, 2011
    http://www.imf.org/external/np/tr/2011/tr101411.htm

  23. wally says:

    “The two income family began expanding long before 1979 . . .”

    Clearly, the time has come for polygamy.

  24. abhikush says:

    There is an interesting counter argument at http://politicalcalculations.blogspot.com/2011/10/top-1-vs-s-500.html

    “By contrast, our S&P 500 at Your Fingertips tool indicates that if the Top 1% had just invested their after-tax income in an S&P 500 index fund in January 1979 and then let it ride to December 2007 as the stock market peaked, fully reinvesting dividends all that time, they would have seen an inflation-adjusted, tax-free rate of return of 8.70%.”

    ~~~

    BR: How is that a counter argument?

  25. Petey Wheatstraw says:

    jack:

    Chris Rock, on being rich vs. being wealthy:

    “Shaq is rich. The white man who signs his check … is wealthy.”

    Superstars don’t own the industries that employ them. Those who have tried to sell their talents outside the industries that control their field of superstardom haven’t done too well.

    There’s a reason the NFL isn’t player-owned.

  26. theexpertisin says:

    Used to be that a significant percentage of those in the lower class tended to learn a trade or further pursue higher education (with parental threats) towards the professions as the ticket to self worth and an increawed measure of financial success.There wasn’t a closet industry of multi-generations working the system for benefit angles who view this as their full time job and “right”.

    Track government vote-buying largesse from 1979-2011 and see the how the incentive to raise oneself up has been diminished in percentile measure by having someone else, Big Government, provide life’s necessities (and luxuries). Even FDR would be rolling over in his grave, wondering how social security was basterdized from his original intent into a conglomerate of welfare that would shock and awe.

  27. DeDude says:

    We have a huge problem with unfair distribution of the benefits from increased productivity. Society has clearly become a lot more productive in the past 3 decades, but the benefits of this increased productivity has been harvested almost exclusively by the rich rent collecting class. Yes some of the middle class families have better household incomes but it has almost all come from working more hours either by the individual or by having 2 people rather than just one working outside the home. We have also had a lot of false increases in living standards based on people spending by increasing debt or reducing savings.

    Capitalism and the working class are like the scorpion and the frog. It is in the nature of the rich bastards running capitalism to suck all the wealth and money out of society, even as this removes the consumption and social stability upon which a capitalistic society grows. If I were one of the rich bastards I would bribe the politicians to immediately double the minimum wage and put a 30% tariff on all imports; but then again if I were one of them my greed would probably blind me from understanding why that would serve my own interests.

  28. mathman says:

    What’s missing in this is the (just in time for Halloween) fact that “we” know where “they” live.
    Muuaaaahhhhaaahhhaaahhhaaahaaaa

    As Lou Loomis (in Caddyshack) said:

    I’m going to put it right on the line. There’s been a lot of complaints already. Fooling around on the course, bad language, smoking grass, poor caddying. If you guys want to get fired. If you want to be replaced by golf carts, just keep it up.

    Playing this as a completely ass-backwards metaphor, that would be the lower classes represented by the OWS movement currently (the polite way to ask) as Lou telling the masters of the universe to wise the eff up before we have to come over there.

    Look, most people, believe it or not, are totally not interested in being rich and owning a whole buncha shit that ends up being an anchor around their neck. No, most of us just want a decent job (decent meaning it’s no fun when your boss is an asshole) with a livable wage (enough to pay the bills, go out once in a while and provide a decent life to the kids, you know – a house you can call home, like a family vacation or whatever, a nice Christmas perhaps) Hey, and a little respect wouldn’t hurt.

    i mean it would be nice if the political process worked – you know, ya vote one of these clowns in to office to actually do what they say, and poof: it doesn’t work like that anymore! What’s the use in voting if it doesn’t work? It would be nice if “they” played by the rules too. But no – that’s for the little people.
    No Constitution anymore, no enforcing of regulations on the “playas”, and the giant megacorporations don’t even pay taxes anymore.

    Well ya know, if it gets bad enough, all these millions of pissed off former consumers (many of whom are armed to the teeth) are gonna take matters into their own hands – then it’s chaos and hard to put that genie back in the bottle once it’s out. Anyone remember Watts and the long hot summer? i hope the polite protestors make their point before it gets to that. We just want our country back the way it was – we want our cut of the pie and to keep the place up for the kids, okay?

    again from Caddyshack, this time Ted Knight as Judge Smails:
    “Well . . we’re waiting . . .!”

  29. jack says:

    petey:

    no argument on the chris rock observation. most are pawns in the game. but that is irrelevant to the topic thread. the CBO release was about income disparity, not net worth. what they do with the money after they get it would be another interesting study. what i do with my money after i earn it and pay the taxes is not anything i want the CBO scoring.

  30. dead hobo says:

    I know how to make the rich a lot richer, and it will be a lot of fun to watch.

    All those creative souls who worked for creative i-banks back in 2006 have a new opportunity to demonstrate their genius for financial innovation. What we need are some good three tranche European Investment Securities, similar to the familiar mortgage backed securities. Europe is filled with good, better, and best quality debt, with ‘good’ being debt with a Mediterranean flair. This won’t be your father’s NINJA debt. This will be the good stuff, likely backed by the EFSF (to some degree, possibly). You can augment the fun with CDOs. Should the Fed decide QE3 is required for some unforeseen reason, you can imagine the fun this will bring to the new Europe investment opportunity. I bet housing in the US would improve from the exuberance. Is this coming 2012-2013?

  31. Ramstone says:

    The precise reasons for the rapid growth in income at the top are not well understood…

    You’ve got to be kidding. This isn’t rocket science.

  32. TripleSigma says:

    Yeah, “the rich” have the majority of their income coming from assets (Businesses, stocks, corporate debt)- which keep up with M2. The poor do not. I dont know anyone who is a wage earner who got a raise of 10% a year, but that is how fast M2 grows.

  33. Francois says:

    Speaking of bad outcomes, here are two that are already hurting us, and shall do so even more if we don’t do something about it. pronto.

    New Social Justice Index Places U.S. Near Bottom
    http://www.sgi-network.org/pdf/SGI11_Social_Justice_OECD.pdf

    Social Immobility: Climbing The Economic Ladder Is Harder In The U.S. Than In Most European Countries
    http://www.oecd.org/dataoecd/2/7/45002641.pdf

  34. csainvestor says:

    http://www.theatlantic.com/business/archive/2011/07/squeezed-dry-why-americans-work-so-hard-but-feel-so-poor/241252/

    Take the median worker salary- 105 million Americans make 26,500 or less.

    Now take a look at expenses.

    7000 rent
    4000 med
    2500 state, local, sales tax
    1500 FICA
    3000 federal income tax
    2000 food

    Utilities 1500
    Bus 1500

    Toiletries 1k

    24k

    26,500 minus 24,000 = 2,500 dollars.

    Is this person saving anything for retirement- can they even afford it?
    They probably have a high deductible on their medical insurance as well.

    Remember, Half of the people that work in this country makes 27k OR less.

    The trifecta of inflation, corporate greed, and lower taxes on the rich have murdered the middle class.

    Here is a personal anecdote.
    My friend works for a company that just had a pretty good year.
    The CEO gave my friend’s boss, a pool of money to distribute to his workers as he saw fit for their yearly raises.

    The boss gave everyone under him a 2% raise, but he gave himself a 50% raise.
    He kept half of the money for himself! And the CEO thought nothing of it.

  35. bmz says:

    a) Taxes: Just about every Republican politician alleges that: “we do not have a taxing problem, we have a spending problem;” but this is a lie. Everyone knows that Ronald Reagan reduced income taxes (more than one half for the wealthy); what is less commonly understood is that he offset this by raising payroll taxes(more than double for most self-employed). Today, most American families pay more in payroll taxes than they do in income taxes. Prior to 1981, income taxes averaged 12%(+/-1%) of normalized GDP. Reagan reduced income taxes to near 9%. Clinton increased them back to 12%; and Bush/Obama reduced them again to 9 %(and below). However, on budget expenses(which excludes Medicare and Social Security) have remained 12%(+/-1%) of normalized GDP throughout. The deficit in income taxes has been financed by borrowing, largely from the Social Security trust fund. When Clinton raised income taxes back to 12%, this eliminated the on budget deficit. The CBO projected that this, plus the Social Security and Medicare surpluses, was enough to pay off the entire US debt by the time that the Social Security/Medicare trust funds would have to be amortized for beneficiary payments, all without having to raise taxes to pay for the amortization of those trust funds. Like Reagan before him, Bush took those excess payroll tax receipts and gave them “back” as income tax reductions, heavily weighted to the wealthy–who didn’t create those surpluses in the first place. By doing this, Bush guaranteed that income taxes would have to be raised in order to amortize the trust funds. The failure to do so simply permits the 1% to steal the money contributed by workers for their retirement. Everything about not raising taxes or limiting expenses, is about stealing the 99%’s money. The national debt has been caused primarily by income taxes which were reduced far below their historic 12%(+/-1%), not by on budget expenses, which have remained at their historic 12%(+/-1%) throughout. These taxing games have transferred billions of dollars from the 99%’s payroll taxes to subsidize the wealthy’s income taxes.

    b) Healthcare: Healthcare has been the primary mechanism for redistributing income and wealth upwards. But for increasing health care costs, over the last three decades median US real wage increases would have more than doubled. US healthcare costs are twice, or more, than those of virtually every other industrialized country; and consistently, the incomes of physicians in the US are over twice theirs. Because our competitors’ healthcare costs are so much lower than ours, our manufacturers and workers suffer huge competitive disadvantages. Our healthcare system transfers an almost unbelievable $1 trillion per year from the the middle class to the wealthy. Hence, the single most important way that we can reverse the upward redistribution of income is to adopt a fully socialized healthcare system (similar to those of our competitors, and the Veterans Administration–which is this country’s highest rated healthcare system). This is also the primary reason that the 1% and their Congressional allies so strenuously resist attempts to reform healthcare.

  36. econimonium says:

    It never ceases to amaze me the number of posts that will tell me how to interpret the data in way other than the data clearly states. Come on people just admit it…we’ve enabled a system that has skewed compensation to the top. Now, what do we do about it other than vote out all Republicans and let the needle swing back? Discuss. ;)

    Now about that “oilman” quote. He seems to not understand that when his class comes after police pensions, and they now are, the cops will wake up and let him get shot as the look the other way. Qaddafi had an army, remember. Fat lot of good it did him once they found him and abused then shot him. I suspect this “oilman” would face the same fate here except we tend to hold “the law” in higher regard. At least until a mob starts. Which is why Buffet and people like him are merely being canny…if you give up some of what you gained (which in the long run really isn’t much for you) you get to keep everything. It isn’t altruism but a survival tactic. And it’s a smart one which is why the 1%ers are giving money to the Obama campaign in multiples that should make the Republicans nervous about the next election. Someone knows how to place a bet here…

  37. Grego says:

    I’ve always figured it’s American Exceptionalism, from grand institutions down to the individual. If you believe you’re exceptional, it’s hard to accept that your institutions have grown archaic and inadequate as the world has changed, and it’s hard to accept that someone’s sticking a figurative broomstick up your rear. Perhaps it’s a trait of empires; first their driving force, then their undoing.

  38. rd says:

    Historically the US has gone through cycles like this: the canal and railroad bubbles, the Gilded Age, the Roaring 20s, and the past two decades.

    I think the common thing that happens is that money becomes the most important thing in the middle stages of these cycles. As the cycle wears on and inequality rises, otehr values come to the fore. The Gilded Age gave rise to unions and suffragetes; the Roaring 20s culminated in the New Deal and the “Greatest Generation”, our cycle is starting to break down as well as the protests increase.

    Each of the major up-cycle periods culminated in massive extended bear markets and extended periods of greatstress, but the country usually comes out stronger at the other side.

    This time around, the financial sector and the 1% that is part of the financial sector has tried to become TBTF. It worked over the past decade in the first couple of legs of this bear market, but it is unclear (unlikely) if (when) they will remain TBTF if another bear leg shows up. The cessation of money worship and a re-focusing on multi-value balancing will commence the next growth stage.

  39. csainvestor says:

    Barry, no one begrudges those such as yourself that are in the 1% because you get it- you really do.

    You don’t shill for fox news and spew the koch brothers talking points, because you get it. Many other successful individuals get it as well – many are in the 1%, yet they understand that a gross amount of income inequality isn’t healthy.
    When something becomes unbalanced, it falls and shatters.

    30 years ago the top earners made 40x what the median worker made. That 40x salary enabled those in the top percentiles got to go to Paris and catch some waves in Hawaii. The workers saw what there bosses had and they knew if they worked, they had a legitimate shot at attaining some version of it- with hard work that is.

    Today that same top earner makes 300x what the median worker makes, and instead of going to an island for a vacation they buy one in Dubai.

    There is only so much to go around and those in the top one percent own 30% more of it today than they did 20 years ago. At that rate, they will own it all.

  40. csainvestor says:

    P.S.

    Barry, i believe if you were born today, or even 15 years ago, you probably wouldn’t be able to make it to the 1%.

  41. 873450 says:

    It’s not easy being 1%.

    How these uncertain, job creating victims of class warfare manage to drag themselves out of bed and make it through each day without collapsing into despair is beyond my comprehension.

  42. philipat says:

    Barry, I assume that your question was retorical because you know the answer and have very eloquently written on the subject extensively on prior occasions.

    IMHO, in summary, the problem is one of crony capitalism which loads the dice in favour of the already rich and well connected. The poliyicians are bought and paid for by Corporate interests such that Congress is a wholly-owned affiliate of Corporations. In turn, the politicians are expected to perpetuate and extend policies that favour the same Corporations and bail them out when bad decisions turn bad.. That is, put more simply, corruption. “We the people” simply have no effective representation in the present system. This is, or should be, at the heart of the OWS (And DC) movement.

    This cannot end well and I fear for the future of the citizens of “The United Corporatocracy of America”.

  43. Healthcare Actuary says:

    BR – While I agree that the skewness of richness in favor of the few is a troubling social reality, I recently read an interesting thesis that it may simply be borne out of the scalability one can achieve in the modern era with even a slight edge in capability or talent. The example given was Shakespeare who was certainly not incredibly wealthy because it would not have been possible to monetize his talents internationally by scaling his talents glabally. JK Rowling on the other hand was capable of taking one masterpiece and accruing exorbitants amount of wealth from Harry Potter. This is structural reality of living in a technologically advanced, glabal society and I’m not sure what could or should be done to stop it. Similar scalability now exists in any line of work where even a small competitive advantage can result in limitless wealth accumulation

  44. MaxThrax says:

    At this point the only thing that will save this Republic is a massive Wall St perp walk.

  45. Topspin says:

    BR: “Thus, I find myself in that top 1% economically;”

    I appreciate the candor. Can we finally just say you are rich?

    There was a post April 14, 2011 (http://www.ritholtz.com/blog/2011/04/ive-got-some-good-news-some-bad-news/comment-page-2/#comment-545909) where you commented you were not rich, merely middle class, by NY standards, living in a middle class neighborhood etc. that being because you were only in the top 10% of NY earners, that the top 2% and 1% were orders of magnitude higher. In this post you dissect the top 1% to “the top 0.1% and the much wealthier 0.01% ” to say where the big bucks are.

    I said ” Seems like an oxymoron to say you are in the top 10% of earners yet not rich. I mean, we’re talking about NY not North Dakota, let alone the entire United States of which if we were you would be in the top 5% to 1%.”

    There’s always someone richer and someone who got it easier.

    This is my favorite blog. I read it all the time. I believe in your humility and “mission” if I may call it that.

    It just seems to me this is the type of “it’s them not me” subjectivity that leads to problems and inability to solve them because it’s always them, not me.

    When is a spade a spade? When is it us? It’s not good enough that it is 99% of the people. Now it needs to be 99.9 or 99.99%!

  46. csainvestor says:

    In New York city the top 1% earn 45% of all income.
    in 1980 the top 1% in NYC earned 12% of all income.

    There are 8.4 million people that live in nyc.

  47. Jim67545 says:

    Let me throw in two more contributing factors:
    1. M&A, IPOs, Private Equity, etc. Generally these enrich the former owners/executives at the expense of the remaining employees. Decreased headcount, offshoring, higher productivity, greater efficiencies in the merged organization are all techniques for improving operating income so as to offset the cost of acquisition and resulting leverage. The result: the lower and middle class employees see incomes stagnate and/or they drop into a lower bucket via unemployment. The world awash in liquidity searching for a profitable deal aids and abets this.
    2. A disconnect between Executives and Boards and their stockholders. With stock held in pension funds, ETFs and other usually disinterested parties practically anything the insiders propose passes without so much as a whimper. Heck, those stockholders neither know nor care anyway. Smart executives help select “knowledgeable” (know how the game is played) board members, reward them with percs and back increasing board salaries, stock options, etc. and, in return, the executives are richly rewarded by the grateful greased insider board members. It’s an incestuous relationship that has gotten totally out of control. And stockholders? If they don’t like it they just sell the stock. That really helps. The “parting gifts”, golden parachutes, change of control agreements and employment contracts have become obscene.

  48. budhak0n says:

    After all this time, BR finally asks THE question. Good for you BR.

    Where is America falling short?

    Quite simply. Education. By basing all higher education on some cookie cutter made up nonsense of student loans, and grants, and ridiculous extraneous BS, the United States has created a grand pacifier.

    If you’re bright and able to do the work, you can plop yourself into any myriad of bobo U or tech schools, and get yourself a seat in a dorm or a cafeteria and flip through all this wonderful nonsense that stocks our shelves.

    But if you really try to address the problem, oh well, what you’re greeted with is a never ending series of supposed adults in positions of responsibility whose basic theme in life is , well that’s all very fine and good but it’s got nothing to do with “me”.

    Same problem in America. But on a much more serious and vicious scale.

    In order to supposedly “make” it here, you have to go through so much bullshit that by the time you’re even possibly content. And I use content almost as a curse word because nobody who is successful is content.

    But by the time you “work” yourself into any sort of position that you may be happy about economically, you can’t help but have the attitude of “screw the rest of them”…. Let them go through the crap I had to go through to get here and then maybe just maybe I’ll actually listen to their gripe.

    Sorry wish I could be all koom ba ya and altruistic as the rest of you. I guess I’m not yet in that strata.

    It always seems to me that the people who want to sing by the fireside really in many occasions don’t remember what it was like to be left standing on the side of the road with their pockets turned inside out.

    You also have to realize that I’m one of those guys who although I support a public school system am not really comfortable with the fact that while my kids have to pay for lunch other people get to fill out a piece of paper and claim they don’t have enough money to eat.

    At a certain point, the supposed “middle” class gets tired of pulling the weight for both ends of the spectrum.

    There’s the guy and gal who really get a raw deal and just need a hand to stay on their feet. And then there’s the complete ahole who’s off cruising around in the back bays on his boat telling everybody what a wonderful charitable contribution he makes every year. Both of them are full of crap. And the majority is in the middle somewhere.

    That’s why most people just don’t really care what people say anymore. Most people are so full of crap it’s not worth the time to listen. Present company included.

    I have no idea what Percent I’m in. I’ll leave that up to the pundits to decide.

    You want to “improve” America. Look at the educational system and adopt something akin to what they do in Germany. Penalizing people for getting an education while rewarding people for having more kids on welfare is completely moronic.

    Never happen because despite all our wishes to be evolved apes, we’re still in Michael Jackson’s Neverland ranch.
    It’s just gotten so big that most people don’t recognize it anymore.

    NYC is a great paradox as well. The very wealthy live all bunched together like that as opposed to olden times when they had grand estates in the mountains with sheep and horses and goats

  49. Lukey says:

    This trend in wealth disparity has everything to do with the growth of technology and globalization. The smart and talented and the ambitious (and the popular) have a vastly increased market to peddle themselves into and technology gives them unprecedented marketing reach for very little money. That this allows some people to make incredible amounts of money while those who drop out of school or study some unusable subject matter or who are lazy or (let’s face it) unteachable are still stuck in the economy of our grand parents, cleaning floors and doing dishes and punching keys on a cash register. How is technology or a worldwide market of billions of consumers supposed to make THOSE skills more valuable?

  50. UncleMilty says:

    The way this data is presented is a little misleading (on purpose?).

    First, the median household is shrinking. If you look at earnings per worker, the picture is not nearly so bleak. You can’t expect a single mom to earn the same as a married couple.

    http://mjperry.blogspot.com/2008/08/adjusted-for-household-size-real-income.html

    Secondly, I suspect much of the shift from wages to business income is a result of pass through entities (LLCs, S-Corps) where owners are incentivised by the tax code to decrease their wages and allow profits to flow through on their personal tax return. My guess is that Barry’s business is an S-Corp and his salary is lower than it would be if her were a C-Corp. If Barry had been born 30 years earlier, the wage vs business profit allocations would be much different.

    Lastly, it is vital to remember that the top 1% and bottom 25% ARE NOT THE SAME PEOPLE each year. This is especially true with the increased use of pass through entities. Business profits are not consistent like wages. Studies of individual taxpayers over long periods of time show tremendous mobility. This just make sense, if you think about it. How much did you earn in your 20s? How about your 40s? When you were 80? Most people start out low, make steady gains and then tail off in later years. This is a reflection of OPPURTUNITY. And there are powerful demographic forces (i.e. college, marriage, etc.) that affect how far/quickly people move through those groups.

    http://mjperry.blogspot.com/search?q=income+mobility

    Mobility is a blessing, not a curse. It’s almost like you would be happier if fewer people had the oppurtunity to get rich.

  51. Wiggs says:

    The CBO data is a somewhat misleading. The income data is obtained from tax returns which include quite a few small businesses filing as partnerships, sub-S corps and LLCs whose income shifts to the “personal” category. I don’t know what the percentage is but my guess is that small businesses make up a fairly substantial percentage of the “Top 1%”. We should be careful to not get carried away by the media’s field day with income disparity because the “Top 1%” does include a lot of potential job creating entities once sustainable demand decides to show her pretty face again.

    Just as a point of reference, according to the FDIC’s Quarterly Banking Profile, 2,358 banks filed as sub-S corps and their ROA was an an underwhelming 1.28%.

  52. ctc says:

    Also worth asking is the relative weight of income mobility vs. income disparity in healthy societies.

  53. DTT says:

    It should not matter if there is income inequality as long as the economic pie is still growing. What matters is standard of living and are people living better lives, in general, than they were in the past. Wealth is not a fixed pie. If the rich get more, it does not mean the less-rich get less. The rich are getting rich because they are providing value (in terms of providing capital or providing goods and services) to society. The bigger problem is a social one where human nature and jealousy kick in and people resent the rich for being rich.

    You should watch the following:

    http://video.pbs.org/video/2160792049

  54. victor says:

    No set of data covering such a major topic will be 100% correct, hence the many comments disputing the CBO Data; it is non partisan for sure and I find it quite useful. Here are a couple of extra strikes against the lower income folks, per http://www.census.gov/compendia/statab/2011/tables/11s0083.pdf

    1) they have higher fertility rates than the high income households, thus larger families, more mouths to feed

    2) due to a variety of reasons, many poor multi children families are headed by single parents, overwhelmingly mothers

    Hence the vicious circle of near/full poverty leading to less education opportunities leading to more poverty. This vs. the virtuous circle for the rich families with one or two kids only.

    Mitigating factors: the rich households low fertility rates leads to …genetic dead ends, at least theoretically, the kids of the poor, will eventually get to live in the empty mansions of the rich who left no descendants; and upward mobility still works in our society although an article worth reading ( The Economist: http://www.economist.com/node/3518560) shows data/studies substantiating that mobility has DECREASED in the US since 1990.

    Having lived in several 3rd world countries, ours is beginning to look more and more like them. So, Que faire? I will emphasize EDUCATION in the long list of remedies/solutions proposed here. But, more science, more Logic, Math and ..Latin (yes Latin), leading to our economy producing more things and less paper (financial). And please, no fancy social engineering schemes by a “well meaning” set of politicians. Wanted: Statesmen not Politicians.

  55. Jazysaurus says:

    Petey Wheatstraw right here!!! High five and all man.

    You said it better than I ever read anywhere:

    October 27th, 2011 at 12:23 pm
    “Where is the United States falling short?”
    _________

    Policy, of course. All that changed in this period was policy.

    The middle class voted to do away with the policies that kept the wealthy and powerful from disenfranchising them, and voilà, they were disenfranchised.

    whew … that was awesome … really … so crisp … so short … and so true!

    A more humorous way of saying things:

    CONSERVATIVE MEDIA DEFINITION
    is the ultra rich using the merely rich to convince the middle class 24/7 that this financial misery is fault of the poor.

  56. abUWS says:

    BR – You claim a “fail” because someone submits information that, using the math, would diminish an argument just because a link wasn’t supplied.

    Here is just one link as to the shrinking of US households: http://www.msnbc.msn.com/id/14942047/ns/technology_and_science-science/t/census-us-household-size-shrinking/

    I didn’t supply it because it has been pretty widely known and reported. That you thought you needed to dash a legitimate argument might mean you need to believe in the huge disparities and are looking for supporting arguments and discounting the disagreeing ones. Isn’t this the kind of rationalization you warn investors about? I expected better.

    Just as investors should be open to the counter arguments to their beliefs so should people be open to the opposing arguments in politics.

    ~~~

    BR: Your math skills are wanting.

    If households are shrinking, what does that have to do with the distribution of income in by decile or percentile? Are you arguing that the lower 90% are shrinking, and therefor that accounts for the difference? Are you claiming the top 10%, 1% or 0.1% are NOT shrinking proportionately? Asked another way, WTF does average household size have to do with average income distribution?

    We understand these are both number-thingies, but statistical analysis dont work like that.

    FAIL X2

  57. [...] we have discussed, from 1979 to 2007, inflation-adjusted incomes of the top 1 percent of households increased [...]