Rich People Have Lots of Money
Ezra Klein reproduces two charts from the Center for Budget and Policy Priorities showing that the real income of the upper quintiles is rising dramatically faster than those of the lower quintiles.
These gains are impressive, indeed. But not exactly surprising.
After all, the bottom quintile is bounded. Some significant percentage of them have no taxable income at all. And welfare benefits don’t count as income for tax purposes. The top quintile, meanwhile, is essentially infinite.
In 1979, most people knew the names of every single billionaire on the planet; there were only a handful of them. There are more billionaires in India now than there were in the world then. The United States had thirteen as late as 1985. And then it started to explode — we had 99 a mere five years later. We’re well over 700 now. That’s going to skew the numbers a bit!
But, remember, these are inflation-adjusted numbers. So, the poorest quintile has seen an 11 percent gain, the middle quintile a 21 percent gain, and so on. In real terms. And that’s not accounting for the fact that the cost of luxury goods, especially electronics, have plummeted and that things that were either luxury goods — or the stuff of science fiction — in 1979 are now commonplace even in the lower strata.
And, of course, there’s significant social mobility. To be sure, there’s a wide gap in what the poorest of the poor and the richest of the rich can do for their children. But, outside perhaps the top and bottom five percent, these economic strata aren’t a caste system.
Let’s reserve judgment on this until we see what things look like through 2008. I suspect we’re going to see something of a change.
Also, I’m more concerned about the significant proportion of the top quintile who are government employees or owe a substantial proportion of their incomes to the government than I am about the small number of ultra-rich.
“there’s significant social mobility.”
Please back up this statement. For the stated period, has social mobility increased. I believe this is either a totally uninformed assumption on your part or a total lie. And please don’t pass off Cato study that cast middle class college students going from working in the campus bookstore to the same white collar jobs of their parents as social mobility.
“One study, by the Federal Reserve Bank of Boston, found that fewer families moved from one quintile, or fifth, of the income ladder to another during the 1980’s than during the 1970’s and that still fewer moved in the 90’s than in the 80’s. A study by the Bureau of Labor Statistics also found that mobility declined from the 80’s to the 90’s.”
“mobility is lower in the US than in France, Germany, Sweden, Canada, Finland, Norway and Denmark. Among the major wealthy countries, only Britain has a lower rate of mobility than the US.” Tom Hertz of American University, “Understanding Mobility in America
“these economic strata aren’t a caste system.”
“Children born in the middle quintile (the 40-60th percentile of incomes in the country, $42,000 to $54,300) also have only a 1.8 percent chance of reaching the top five percent, a likelihood not much higher than in poor families.”
“Only 3 percent of African-Americans jump from the bottom quarter of the income distribution to the top 25 percent, while for whites this number, still small, is 14 percent.”
I think we need to look again at that chart. The bottom bound (zero income) is certainly a limit, but that doesn’t say why three of the 5 quintiles should lag.
In a vibrant market economy, shouldn’t 4 of the 5 quintiles move strongly off that bound?
(The mobility question is tricky, because we don’t know how many people in the top quintile for 2008 “live there” and how many are “visitors”. Put another way, what fraction of Americans have been in the top quintile for any year? How many have stayed there for the last 5 years?)
Maybe it’s just me, but were I doing a graph of the data, I wouldn’t pick end points of 1979 and 2006. To do so suggests cherry-picking of data.
Perhaps 2006 is the most recent data available. If so, then roll back the starting point to 1976.
I would like to see the impact of immigration on this quantified.
The migration of millions of mostly poor immigrants into the US has to have a big impact on the lower quintile.
Not only is the lowest quintile closed we have added millions of people to it via immigration.
This is based on income. Is there a meaningful measure of wealth compared to income? People can make a lot of money and accumulate little wealth and vice versa.
I hadn’t thought of either the “lower bound” issue, or the impact of immigration, although that seems fairly obvious now that you mention it. However the disparity doesn’t seem all that shocking to me anyway, and I think one would expect the top to be doing significantly better than the bottom if we assume that some people are more productive than others. Moreover, it’s clear that all five quintiles are moving in the right direction.
The real issue is social mobility, and when I click on the “mobility” hyperlink in the post all I get is a Blackberry ad. I think there is some fairly convincing empirical evidence that social mobility has declined in the US, which ought to concern anyone. However, I’m not sure I entirely trust the people who’ve produced these studies, like Will Hutton. Moreover, I’m not terribly concerned about parental educational attainment predicting child educational attainment. That’s easily dealt with. If there is a decline in social mobility in the US it’s probably not due to “legacy admissions” to Princeton or Harvard. It’s something much more fundamental, and also much more difficult to correct than “income disparity.” And an attempt to correct the income disparity without correcting the underlying problem (which is probably control of capital) will only make the problem worse.
Excuse me, Duracomm was the one who posted about immigration. Credit where it’s due.
The president makes 400,000 a year for the job. Congresscritters make significantly less. The rich government folks didn’t get rich by working in public service (leaving aside the successfully corrupt).
Unless you mean that the non-representational nature of our republic I just don’t see the problem you are implying.
In a related note I have to laugh when the right declares how unfair it is that the rich pay all the tax. If the top 10% don’t want to pay 70% of the tax maybe they could try not owning 70+% of, well, everything.
Any tax rate that results in increase income inequality is insufficiently progressive.
Again, this isn’t at all obvious to me. Nor should it be. If one assumes that some people are more productive than others it makes sense that they’d secure a significantly higher proportion of income, and if that weren’t the case then something is clearly wrong. But it’s also a fallacy to conclude that those with higher incomes got there simply because they are more productive or more creative than the rest of us. That depends. The way to disentangle this, of course, is to look at inter-generational social mobility, since we can expect that the scrappy nature of living lower on the socio-economic ladder will tend to move some people in the direction of higher creativity and productivity, and if that isn’t the case them something is wrong.
Finally, the problem isn’t the maldistribution of income. If there is a problem, it’s the maldistribution of power, and a faux focus on income distribution might be very useful for those wishing to deflect attention from that. You know that most “rich people” are liberal, right? I wonder if they’d be so liberal if it threatened their position on the power hierarchy as much as their income?
Umm, no I don’t know that…you got any proof to back that statement up…
There’s an even more fundamental problem with this analysis: between 1979 and 2006, a significant number of people were born or immigrated to the US and a significant number of people died or emmigrated. Since the population isn’t constant, there’s a significant difference between the average increase in income and the increase in average income. This chart is showing the latter but prentending it’s showing the former.
Concrete example: suppose tomorrow we passed a law saying that all people, regardless of job, are to be paid their age * $1,000 per year. For instance, a 20 year old would be paid $20,000 per year and a 25 year old would be paid $25,000 per year. Now clearly everyone in the country’s income will, by definition, increase by $1000/year. But what happens if we compare the average income this year vs. the average income next year? Depending on the particular demographics of society, the average income could increase, stay the same, or even decrease even though every single person is getting a raise.
Well, here’s an analysis in Slate of the most recent Presidential election, by Daniel Gross. The relationship between wealth and ideology is complex, but Lipset proposed several dimensions of liberalism in his “blue collar authoritarianism” thesis. As a general proposition if liberalism is conceived as wealth redistribution then the “working class” are more liberal than the “middle class.” If liberalism is conceived as tolerance and individual sovereignty the relationship is reversed. But the difficulty with that notion is that it’s somewhat dated, because in a post-industrial society we no longer think of “classes” in the same way. Working-class is more or less merged with middle-class. But ideological class loyalties were never all that stark.
The phenomenon that Gross observes certainly casts doubt on a lot of assumptions about people voting their economic interests, as measured by income level. There are other kinds of “economies.” And there’s a clear trend among upper income levels toward statism. I think the explanation of this is probably illustrated most convincingly by the “FDR Class Traitor” thesis. Under the circumstances he wasn’t really a class traitor, but was attempting to preserve privilege at the expense of a portion of income. It’s a simple utilitarian tradeoff.
I know this is bound to be controversial, and unpopular with a lot of people.
Indeed but there a huge difference between “significantly higher” (which I have no problem with) and “insanely higher” (where we are). Nor, in fact are those with insane salaries demonstrably more productive or valuable to society than those who are paid less well.
Let me give you an example. I worked for Intel for nearly a decade in their labs helping to support the development and manufacture of our main product- semiconductors. I was paid around 50 grand a year including bonuses and stock. That’s pretty fair in general and while it didn’t let me live like a king it meant I could more or less make bills and didn’t have to eat raman 4 days a week.
The Intel CEO made 12.4 million last year. That means he made almost 250x as much as I did. What did he do for that money? Jack shit. Otellini’s basically a joke. He was our first non-engineer CEO and it showed. But beyond that the CEO is a figure head. Nothing really important comes from him. He produces literally nothing. The actual production of the company occurs within the first two to three levels of employees. Everyone above that is basically a logistics officer at best and at worst a source of stupid busy work (and we got an awful lot of that from managers trying to justify their existence, which means their only contribution was to make all of us actual producers less efficient).
But hey let’s pretend for a moment the CEO does more than jet to various trade shows in between golf rounds. Is anybody so ignorant as to believe the CEO actually does the work of two hundred and fifty low level employees (more if you looked at the bottom of the totem poll which I was near but not quite at)? No, obviously not.
So why are they so highly paid? Wouldn’t the market correct for this? Uh, no. Market forces, mythical as they are, have no hold at all when talking about executive positions filled and controlled by a group of shareholders, most of whom will be friends and colleagues of the very people whose salaries they set.
I’m not saying everyone should be paid the same. If the range from median to highest paid was on the order of a few dozen times (as it was only three to four decades ago) that’d be acceptable. Right now the difference between the median and the highest paid is a thousand fold (literally). That’s insane. It’s unsustainable.
The correction is to tax the ever loving hell out of it so as to reduce the incentive.
if you want to be blown of your socks try this same chart with total wealth instead of income. The gains over the last 20 years are eye popping even though the distribution was way out of whack even before that. You don’t see studies on this because the information is very difficult to gather and those on the top don’t want it getting out least the tea bags give way to pitchforks.
This is knid of encouraging. I read blogs from both sides of the political spectrum, including a bunch of economics blogs. It is fairly unusual in my experience to see actual numbers and data presented on right of center blogs. There is more opinion and less data IMHO. OTOH, maybe I just havent found the correct blogs yet. If anyone has any suggestions, I would greatly appreciate them. While this is not purely an economics blog, I would love to see you guys do more data analysis, or at least cite some when making assertions. Since most people are innumerate, I would also suggest some mix of raw numbers and graphic presentation.
One issue I have with the data comparison is its based on household income. The period between 1979 and 2006 saw a significant rise in the two income households.
re: Demosophist at April 17, 2009 21:57
With all due respect, that article does not bolster your case. Yes, it points out that affluent people on the coasts tend to be more liberal than affluent people elsewhere (big surprise!), but it too does not provide any substantial evidence that most wealthy people are liberal…
So what Klein is telling us is that those who produce, and produce well, are getting paid better. This is news? And this is a bad thing? More correctly, overcoming what amounts to merit pay, is desirable?
I suspect Mr. Klein has been spending entirely too much time reading das Kaptial.
Probably nothing that you would consider proof, ultimately. But it is interesting, that there are number of indicators out there that would suggest the like. As an example. Look at the voting patterns in the most liberal states in the nation. California Oregon Washington, Illinois New York Pennsylvania, the New England states.
is there any question that these are the most affluent states and the union? Is there any question that they are the most liberal voting states in the union?
Granted that Michigan stands out as something of a sore thumb; (Given its geographic features you should pardon the pun ) They’ve been voting Liberal for several years, he at Detroit looks like a bloody war zone, and economically speaking Michigan isn’t doing all that well. However, its recent history, practicing 1950, is significantly better. One could aver by that set of conditions, that the current spate of poverty Michigan is seeing is a direct result of its liberalism.
There is also, while I have the editor open on the subject, some indication that a higher population density tends to lead toward more leftist thinking.
That said, I did note an interesting item in the NY Times around the election… I saved the thing but the link I trapped is broken.(It was captured in my palm pilot…before my old Palm Pilot died, and I’m on the new one at the moment.. I’m amazed it made the transition)
Maybe a search against the text will reveal it. Anyway;
Gee, somehow that doesn’t strike me as the uber rich being overly conservative in their voting patterns. One might also consider the tendency to vote democrat given the income level self destructive. However it’s not true; they’re voting for their self interest.
Being in the truck, I don’t have the article directly to hand, though I will look for it tonight. The article I’m thinking of pointed to after-tax income levels of “the rich” all and the pattern of same under both republican and democratic presidents. I was surprised to learn that under the democrats, their after-tax income tended to go up, I recall this was particularly true as compared to the remainder of the income quintiles. I’ll see if I can dig that out tonight.
That said, the basis of this discussion were having seems to be focused on the rather socialist idea that we’re still living in a zero sum world… the misbegotten notion that when someone a cheese something, somebody else loses. Interestingly, this incorrect notion of the world seems to have , in our society at least, settled in for the long haul at the ivy league schools. You know, the schools for the rich.
Right on, Tlaloc. The idea that poor people are less productive than the wealthy is a crock. I worked my ass off for a few years working as a cook at multiple locations, and made a pittance. As a white collar worker with a bachelor’s degree I tripled my income doing a lot less work.
Income levels have always been more about social access than about actual effort. In a lot of small towns the rich are the people who were born into families with established pedigrees in real estate, or law, or business development. The kids go to private school, they meet the influential people in the greater area through family connections, they have the money for a college/medical/doctoral degree, find the mentors they need to succeed in business, and continue their heritage of squeezing as much income from the working poor as possible.
Meanwhile the working poor feel like they are spinning their wheels, but instead of working towards a less stratified society most of them dream of becoming a local bigshot who can exploit the less ambitious around him. To create a more equitable and meritocratic situation would reduce their future bigshot earning potential! So “socialism” is unpopular, thanks in part to its association with fertile “welfare queens” and various other darker-skinned people who seem to have an easier lifestyle…
The first comment is instructive: forget the Wall Street billionaires who made their money largely by bilking Main Street investors, lets focus on the 9-5 government workers making 5-figure annual salaries…!! I find it baffling that so many conservatives seem to be shadowboxing “pothead hippies”, “welfare queens”, “bureaucrats”, “union members”, “black power activists”, “rainbow coalitions”, and so on, long after these groups have stopped having any kind of significant impact on the national lifestyle. Like an Alzheimer patient they constantly confuse modern reality with their oppositional experiences from the previous decades…
Are you good at mind reading or projection?
Yes what would we have done without the “innovations” of the top “producers” over the last several years. My god those Credit Default Swaps and complex derivatives were a boon to mankind on the same plan as the telephone and the printing press.
The only thing the “producers” have given us lately is a more effective way of shuffling money from one pile to another (taking their cut at each level of course), gutting American manufacturing by following the buffalo heard of cheap labor around the world and the iPod.
“The rich [and Bithead] are different from you and me”
Rick Dement and Sam, I run a small business. The brainchild of my dealership has produced a great product and service. Dealers and customers have benefited tremendously. This country has many more stories like this to report than the sorry saga of a few privileged financial dorks set free by morons in government. The few have ruined it for the many. Bithead likely doesn’t support those who have abused the system, but does support those of us who make up the biggest percentage of GDP providing jobs and paying taxes. So, take your faux outrage and send it to your representative in DC. He/she will use it to leverage another deal for his/her favorite lobbyist.
Oh look, an argument for more regulation…
The older I get, the more I am convinced that small business is our strength. Big business looks to be just about as efficient and corrupt as government. It seems to me that it is more than coincidence that so many of the measures of income and wealth distribution in 2008 mirror those of 1929.
Cute, but low and outside for a ball. The point you mess is that those credit to fall swaps and complex to revenues were the result of government interference in the marketplace.
Correct, and Well said. To which I would add that the largest portion of abuse came from government entities.
While you’re correct so far as you go, here’s a clue; Why? Why is it that larger corporations have a tendency to become more corrupt? It’s because big business has a tendency to get more involved with government and with unions.
Again, as a rule wealthy people “tend” to vote their economic interests, but they also tend to be more “liberal” regarding foreign policy and by a host of other liberalism measures. This has been fairly well-known for a long time, and as I said Lipset devotes considerable ink to it. If you look at the latest World Values Survey data for the US and correlate either income or self-assessed socioeconomic class with “economic welfare-state liberalism” there is a slight negative correlation, but it’s less than 0.10. That’s hardly as strong as one would expect. I may have overstated the case with the phrase “most rich people are…” because it depends on what you mean by “liberal,” but the expectation that wealthy people overwhelmingly vote conservative even where their economic interests are concerned is just false. And they are clearly “liberal” on a number of non-economic dimensions. Lipset also points out the “wet tory” phenomenon in Britain, as well as the larger “noblesse oblige” concept… observing that the stronger this sentiment the more likely you are to find some form of socialism.
My thesis is that during times of economic extremis the wealthy vote their long term power interests, rather than their short term economic interests… Moreover, this isn’t inconsistent with the multi-dimensional liberalism notion, because you don’t get to implement your preferences in that arena if you don’t stay in power.
If we look at agreement with the statement “people who don’t work turn lazy” in the World Values Survey for the US we find a lot more people in the lower income strata strongly agree. For instance, about 23% of those in the US who earn $35K to $60K “strongly agree,” while only 12% of those who earn more than $100K do so. Interestingly, 19% of those who earn less than $20K per year strongly agree. So it’s pretty clear that those toward the lower end of the income spectrum in the US tend to believe more strongly in a work ethic, while those who earn $35 to $60K seem to have the strongest work ethic convictions.
re: Demosophist at April 20, 2009 01:08
What’s your point?