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Inequality, Understood.

I came across this table in the Atlantic Monthly today (originally posted at the AEI blog) that does a great job illustrating some of the central issues in the debate over inequality. It shows the change in income growth by income quintile (divisions of 20%) between 1979 and 2007.The first column shows the change in income before taxes and transfer payments. You might say that this is the change attributable to changes in the labor market. As you can see, the bottom 40% of the income distribution lost ground, with the bottom 20% seeing their income drop by one-third, a fairly serious loss. At the same time, the top 60% saw their income rise, with the largest gainsoccurring in the top 20%.The second column shows the change in income before taxes, but after transfer payments like Social Security, Food Stamps, TANF, disability insurance, etc. These transfers bring the bottom 40% into positive territory and significantly boost the income of the middle and 4th quintiles. The effect on the top 20%, not surprisingly, is more modest.The third column adjusts for the fact that family sizes have been getting smaller during this period. If two families have the same income, the smaller family is, in an economic sense, better off, having a larger per-capita income. As you can see, this adjustment makes all the income quintiles better off, although the impact is greater for the top 60%.The fourth column adjusts for tax payments (including negative tax payments like the EITC). Again, everyone is better off, but this is where the bottom 40% finally make it into double digit income growth.There are a number of takeaways from this table (I'm going to ignore the final column today). Conservatives are correct when they argue that more than just the top 1% have seen their incomes rise over the past 30%. In fact, in terms of raw dollars available, all income quintiles have higher incomes today (or at least in 2007) than they did in 1979.At the same time, liberals are correct to point out that this is only true if you include transfer payments and the fact that the EITC takes many low and moderate income families off the income tax rolls. When you just look at the market alone, the bottom 20% have seen their incomes fall. Some of the cuts proposed by the Ryan budget, for example, would fall most heavily on this group. It is also true that most of the income growth is going to the upper quintiles.I think these numbers help us understand the political moment we are in. Rather than the 1% against the 99%, what we have is a bottom 40% who are increasingly dependent on transfer payments and the EITC to maintain their income, a top 40% who are doing reasonably well, and a middle 20% who are experiencing slow income growth, but don't necessarily feel a sense of solidarity with those below or above them.


Commenting Guidelines

So the question is, what are the behaviors of the top 40% that the bottom 40% need to emulate? My guess it has to do with staying in school, getting married before having children...

I don't see how you can count Medicare payments as income when the recipient is the one who paid for it with their taxes. Granted, the upper two quartiles paid for some of it, but still, the middle group shouldn't have to count the whole amount as "income". The money goes straight to the doctors and other health care providers. There is no real growth in income involved.The people who obviously get it in the neck are the people in the second quintile who get neither SS nor Medicare. They pay taxes (which go partially to "income" == SS. Medicare, Medicaid and welfare -- for the others) but get no transfers in return. The same is true to a lesser extent for the non-SS, non-Medicare people in the middle quantile.It's the unfairness of the system than rankles.

Mark --The behavior they have to emulate is choosing to vote for legislators who will vote for a grossly unfair tax system.

Mark, your comment is both stereotypical and snarky.Don't let facts bother your ideology.

I am looking but don't see that the numbers have been adjusted for inflation. This would be important to determine the growth, or decline in real income.

Jbruns --The Atlantic article that links to the original Cornell figures says the figures are adjusted for inflation.

Oops == I wrote that from memory, and apparently I misremembered. The Atlantic article gives the figures, and it doesn't say they're adjusted for inflation. Must have misread something.

"The behavior they have to emulate is choosing to vote for legislators who will vote for a grossly unfair tax system."So much for hope. Or change.

These figures are for household income. One of the major changes over this period of time is the entry of women into the workforce and the growth in the number of two-earner households. That often entails more expenses, for child care and transportation, for instance, to say nothing of strain or the "second shift" confronting many women when gender roles stay unaltered. (It is also true that unemployment may not be as much of a disaster as during the Depression if only one wage earner in a family loses his or her job.)But I'd like to see figures for individual wage earners to complement these. And don't the even more drastic differences in wealth, which can be parlayed into all kinds of advantages in living.

Last sentence should read: And don't forget ...

Very enlightening data and commentary, Peter. Thank you. The disproportionate absolute and relative income gains of the top 1% are highly problematic and deserve intense scrutiny. Such conspicuous inequality increases the level of relative deprivation experiened by the poor with documented negative consequences. The trends are intolerable, shameful.And yet another trend is also troubling: the legitimation of 'poortalk' among the affluent. Social psychologist David Myers defines 'poortalk' as the tendency of we *relatively* wealthy and *merely* comfortabe to bemoan our financial circumstances, claim middle class identity, and insist we are terribly put upon. Somehow it has become acceptable for the 'mass affluent' to focus more on the gap between our income and that of the 1% rather than our surfeit compared to the poor? Only in America, I suspect, could those in the 2nd through 5th deciles feel entitled to rail against the 'rich'...and get away with it! I fully support the Buffett Rule but hope it doesn't disguise the need for higher taxes more broadly. Those of us in the highest and even the 4th quintile are privileged. We have obligations to financially contribute to the commonweal (lower case!) more substantially and to our sisters and brothers in developing nations. (Prospective budget cuts can be expected to decrease our already meager foreign aid whichever party holds sway.) Does anyone have access to comparative income levels around the world? Any notion what level of income would be the cut off income for the world's top 1%? I would love to see the now almost clich 1% trope reframed as the top 1% of income earners worldwide.

Thanks for adding that observation, M. McG. I couldn't agree more that the necessary increase in taxes will have to go well into the 4th quintile and we should stop complaining about it. On the other hand ... Discovering that, say, families earning $35,000 a year turn out to be in the world's top 1 percent (thanks to China, India, Africa, etc., etc.) and therefore should what? Stop worrying about lack of health insurance, foreclosures, the bad schools that come along with low-income neighborhoods? I think that's a non-starter, for all sorts of reasons, political among them. Secondly, I think some of the railing about the top 1 percent, especially by young unemployed people, who seem to be college educated, from the 4th quintile is really railing about the disproportionate power that the very rich have over setting the national agenda, influencing elections, negotiating favorable regulations, and so on, rather than railing about their having too much money and too many houses, yachts, and parties. In this, the railing has a point. Finally, I wish that J. Peter or someone could find out definitively whether these figures are adjusted for inflation or not. I can hardly believe that they are not. If they are not, it is a terrible deception. Thanks to anyone willing to find out.

Bob--Sorry you feel that way, still, I can't help but wonder if the obsession with OPM is not corrosive of the soul. Let's face it: It can't be a good thing that hope and change has devolved into class warfare.

Peter S:I too wish to know whether these data are inflation adjusted. I'd also like to know how much of the widening of the income gap between high and low earner households can be explained by the growth of two income professional households that, as you point out, have certain expenses not discounted in these data.Let's imagine that $35,000 were the world 1% threshold for annual income. Perhaps the figure would be 'spun' to suggest that income inequality in the USA if unimportant, that health insurance et. al. were not deserving of attention. I think that this spin can be refuted by research documenting that relative inequality has disastrous consequences in affluent societies. (Example: The Whitehall Studies) But yes, to the extent that the 'Americans aren't really in need' narrative prevails it is not only a political non-starter but very damaging to movements seeking change.But on the other hand the absurd notion that we, the great majority of us, are in the struggling middle class...a category encompassing most everyone between the 1% on the high end and 200% of the poverty line on the low also absurd and the enemy of any return to progressivity in taxes. How can taxes be raised if most of us are struggling? Especially as we fight for equity for the economically marginalized, we need to own our own privilege and eschew poortalk. Relatively high income, current/eventual access to wealth, higher education and political power are all forms of privilege that bestow favor. Railing about the grossly disproportionate privilege of the very rich isn't inconsistent with conceding one's own privilege and recognizing the greater needs of others.

Mark P. ==Have you read, for instance, Carlyle's "The French Revolution"? That's real class warfare -- people getting guillotined all over the place literally. And it ent on for years. (Use of exaggerated metaphors against an opponent is a sure sign of a weak opinion. It's sort of like a rhetorical fallacy.)

Ann--No, I have not read that, but I think class warfare, like all warfare, begins in the soul. I don't think that's an exaggeration.

In the absence of a statement that the figure ARE adjusted for inflation, I think the logical conclusion is that they are not. Adjusting for inflation gives a different picture. Click to View

It is also worth noting that income is related to, but not the same as wealth. If you look at wealth distribution, which arguably is a better measure of inequality, the top 20% of households own a staggering 85% of all personally held assets. The top 1% owned 35%. Furthermore, the only 'wealth tax' in the United States, that I can think of, is the Inheritance Tax, also called the "Death Tax," that many conservatives want to abolish. Much of that wealth was never taxed at anything close to the highest marginal income tax rate.

I dont see how you can count Medicare payments as income when the recipient is the one who paid for it with their taxes.

Would that that were the case, Ann :O)

One of the major changes over this period of time is the entry of women into the workforce and the growth in the number of two-earner households.

Yes, that's the elephant in the room that's commonly overlooked. When women entered the workforce in great numbers, the modern consumer society was created. Only then.

Discovering that, say, families earning $35,000 a year turn out to be in the worlds top 1 percent (thanks to China, India, Africa, etc., etc.) and therefore should what? Stop worrying about lack of health insurance, foreclosures, the bad schools that come along with low-income neighborhoods? I think thats a non-starter, for all sorts of reasons, political among them.Foreclosures and bad schools are due to behavior and policy problems that have little to do with income differences. The lack of health insurance, on the other hand, is a biggie. Medical care in this country is so terribly expensive largely because the health-care industry, the health-insurance companies, and the government, with Medicare and Medicaid, have collaborated to make it so. The monstrous growth in the amount simple health care costs wasn't inevitable, but now that it's a reality, both business and government have a moral obligation to fix the problem. Well, businesses and government can't have moral obligations because they aren't people, but those two actors are the only ones that can fix things. The American poor and lower-middle-class are truly shafted on the health-care spindle.

Oops - forgot to enclose the first paragraph (from Peter Steinfels 04/14/2012 - 6:52 pm) in blockquotes.

Other factors that affects disposable income is whether are mortgages and paying for education, especially college. A couple paying off a mortgage with two kids in a private high school or expensive public college and with college loans to pay off themselves has a lot less money to dispose of than grandma with the same income. Which is why old folks these days often put money aside for the young ones' educations.And note: disposable income is important for the general economy. When large portions of our monies are going into two sectors (education and housing) the rest of the economy suffers.

Historical note: when I was in college in the '40s-50s nobody ever borrowed money to pay for it and mortgages were less expensive because the new houses were much smaller ccompared to today's MacMansons. This meant proportionately more money went into the rest of the economy which I don't doubt had something to do with the great '50s boom.

"If you look at wealth distribution, which arguably is a better measure of inequality"I'm not sure I would make that argument. Why is it arguable?Btw, personally, I'd be surprised if these numbers *aren't* inflation-adjusted. But let's suppose they aren't. Inflation is a macroeconomic measure that applies to all of the quintiles equally. So the numbers in the chart in the original post would all be lower, but the proportions among them wouldn't change much. If the point of the argument being made here is to illustrate that the highest quintile is doing better than the lowest quintile, that will be true whether or not the numbers are adjusted for inflation.(Btw, the point of the blog post that is the source of these numbers is to serve as a corrective for the irresponsibly fact-challenged populist claims made by the Obama campaign and its surrogates.)

I would just note that, in a sufficiently well-functioning domestic economy, the various transfer payments and tax schemes to push the lowest 40% into positive territory shouldn't be nearly as necessary as they are. The authors of the study seem to attribute the disparity between the upper and lower quintiles in large part to globalization. I take that to mean that the upper two quintiles are "globalization winners" and the lower two are "globalization losers" - no doubt because of the offshoring of manufacturing and other low-skill jobs. I suppose one message to take away from this is, "increase transfer payments". A much better message, istm, is "fix the economy" - for the lowest two quintiles in particular.

Jim, wealth rather than net worth is a better measure because one can accumulate wealth without realizing income. I think the point here is that more and more wealth is being concentrated by the few at the very top of the S-E scale.

One thing that nobody has noticed is that this table does not give us any clear information on what has happened to any particular group of people. It only shows that the income of the households in a particular quintile in 2007 are a certain percentage higher than the incomes of people in that quintile in 1979. These are not necessarily the same people. We could imagine a hypothetical scenario in which all of the people in the bottom quntile moved up to the top quntile, and the top quntile moved down to the bottom quintile, and yet the result might look like both quintiles had modest gains, when in fact one group of households had enormous gains and the other enormous losses. Of course, that is far from reality, and recent studies show that social mobility is actually much less than we would like to think. Many households probably are in the same quintile as they were in 1979. But we have to be realistic and say that most of the households in the bottom quintile today did not exist in 1979, because they are singles or newly married couples, or perhaps a widowed elderly person. Many of those who were in the bottom quintile in 1979 have surely greatly improved their position, or are now deceased.

Matthew, I think you are right that there is considerable 'mobility' among the lower quints. There is, nonetheless, a semi-permanent underclass, characterized by poor education, unstable families, poor health and healthcare. On the other end of the spectrum, there is, more and more, a semi-permanent 'upper class' in America, with access to the best that America has to offer. I'm not making a value judgement so much as an observation.

"Jim, wealth rather than net worth is a better measure because one can accumulate wealth without realizing income. I think the point here is that more and more wealth is being concentrated by the few at the very top of the S-E scale."I assume you meant to say, "wealth rather than income is a better measure ...". The point of the chart seems to be an income point: that "tax units" (which, as an aside, is not the same as households) at the lower quintiles have lost a lot of ground relative to where they were in 1979. For those quintiles, I could make an argument that income is even more important - more of an indictment of economic trends - than the accumulation of wealth, because income determines the poor's ability to consume necessities - food, clothing, rent, utilities, transportation and so on.

Btw - regarding inflation: since 1979, inflation has increased by 216% (in other words, something that cost $1 in 1979 now costs $3.16 in 2012). To my way of thinking, the numbers in the chart here make the most sense if we assume they are inflation-adjusted.One factor that may help account for the poor performance of the lowest quintile is the failure of the the minimum wage to keep pace with inflation. In 1979, the minimum wage was $2.90. If the minimum wage had kept pace with inflation since then, it would be $9.12 today. In actuality, I believe it is $7.25 nationally, with some states mandating higher than the national wage. A worker who has been paid the minimum wage since 1979 will have lost 21% in real income. (That raising the minimum wage has adverse employment effects for the poor was once an article of faith among economists; today it is a subject of controversy.)

Jim, Yes, thank you. I meant wealth (or net worth) rather than income.I think better charts are on: can agree to prefer to look at the statistics and their meaning differently.