Posts filed under “Wages & Income”
Invictus here, folks:
Occupy Wall Street has been the subject of debate with friends and colleagues. Some confusion and misconceptions are out there regarding the protesters’ message: I’ve heard that the OWS movement is anti-capitalist, anti-Semitic, Pro-Socialist, Pro-Marxist, or a combination thereof. Or that they’re just — as Atrios re-popularized the phrase long ago — Dirty F*ckin’ Hippies.
As Barry has described it, “there is an unfocused financial rage in the United States” — and you see it in both the Tea Party and the OWS movement. Rather than mischaracterize why so many Americans — on the Left and the Right — are unhappy, let’s go to the actual data to see what is underlying this negative general sentiment:
Let’s start with the Gini Index, “the degree of inequality in the distribution of family income in a country.” Here’s our place in the world:
Source: CIA Factbook
By way of comparison, Germany is #126 (of 136) with a Gini Index of 27, and Japan is #76 at 37.6.
Within the United States, this is what income inequality looks like from a Gini Index perspective:
Source: Census.gov, Table H.4
Well, How’d the Gini Index Get So Out of Whack?
In brief (footnotes removed):
In recent decades, CEO pay has grown dramatically in the United States. Between the 1930s and the 1970s, CEOs of the largest companies received approximately $1 million in total annual compensation (adjusted for inflation in year 2000 dollars). During this period, the ratio of CEO-to-worker pay narrowed as workers’ wages grew and CEO pay rose modestly. By the 1990s CEO pay grew dramatically. Business Week estimated that CEO pay at the largest companies grew from 42 times the average worker’s pay in 1980 to 531 times the average worker’s pay in 2000. In 2010, large company CEOs received $11.4 million, or 343 times worker pay, according to calculations by the AFL-CIO’s Executive Paywatch website.
Here are some additional tables on how executive compensation has skyrocketed over the past few decades. Additionally, I’m sure Warren Buffett’s quote resonates with OWS (frankly, it should resonate with everyone — Tea Party included): “Too often, executive compensation in the U.S. is ridiculously out of line with performance. Getting fired can produce a particularly bountiful payday for a CEO. Indeed, he can “earn” more in that single day, while cleaning out his desk, than an American worker earns in a lifetime of cleaning toilets. Forget the old maxim about nothing succeeding like success: Today, in the executive suite, the all-too-prevalent rule is that nothing succeeds like failure.”
A $1MM reduction in a CEO’s pay could be used to fund 13 jobs at $75k/year; nothing too complex about that math. Here are other jobs that could be created if we addressed the disparity.
Meanwhile, while CEOs and other executives have feathered their nests — largely by exploiting overly-friendly relationships with all-too-compliant boards to negotiate outrageous compensation and severance packages — things have not been going quite as well for the rest of the country, as those at the top continue to rise while the remainder continue to drift:
As we have discussed, from 1979 to 2007, inflation-adjusted incomes of the top 1 percent of households increased significantly versus the rest of the wage earners (i.e., the remaining 99%). Those even better off, the top 0.1 percent (the top one one-thousandth of households), saw their incomes grow 390%. In contrast, incomes for the bottom…Read More
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.
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Just today, I overheard someone say that income inequality must not be that bad, because you only need a few $100,000 to be in the 99th percentile (see CNN/Money) — that works out to be about $343k to make the top 1%. That is factually accurate, but misses the full wealth disparity issue. To see…Read More
The latest long term update on employment and wage data is out, and its not remotely pretty: The figures from payroll taxes reported to the Social Security Administration on jobs and pay are, in a word, awful. There were fewer jobs and they paid less last year, except at the very top where, the number…Read More
Category: Wages & Income
There is an unfocused financial rage in the United States. It was born in the late 1990s on an unholy trinity of accounting swindles, the dotcom collapse and analyst scandals. It grew on a housing boom and bust that created 5 million (and counting) foreclosures, leaving more than a quarter of bank financed homes worth…Read More
Here is an interesting interactive tool that lets you look at different year ranges based upon societal gains in income, and how they got distributed. Fascinating to see the shift over the past century: > 1917-81: Bottom 90% captured 69% of income gains > 1982-2000: Bottom 90% captured 23% of income gains > 2001-2008: Bottom…Read More