On the Fall and Rise of Inequality in America

Realizing there is so much more money to make in online advertising, the New York Times has abolished its pay-for-view TimesSelect feature and opened up its entire website to the global online public during the last week or so. The page Now everyone is entitled to our opinion showcases the many op-ed columnists, news writers, online exclusives and other feature that have suddenly come online and become available to everyone free from the NY Times. Whatever one thinks of its editorial policies and political positions, as a pure source of information and now instantaneous communication, the grand old lady of newspapers has become a great addition to the Blogosphere.

The quintessential liberal Op-Ed print columnist Paul Krugman (The Conscience of a Liberal) now even has a blog of the same name, compleat with an already lively comment thread. His inaugural post, Introducing this Blog does not disappoint, addressing the Gap Between the Rich and the Poor (a central theme which he calls "the politics and economics of inequality") using an intriguing graph showing the share of the richest ten percent between the years 1917 and 2003.

In fact, let me start this blog off with a chart that’s central to how I think about the big picture, the underlying story of what’s really going on in this country. The chart shows the share of the richest 10 percent of the American population in total income – an indicator that closely tracks many other measures of economic inequality – over the past 90 years, as estimated by the economists Thomas Piketty and Emmanuel Saez. I’ve added labels indicating four key periods. These are:

The main point about "the big picture" that Paul Krugman wants to make with the above plot is contained in his last line: "...the important thing is to realize that the story of modern America is, in large part, the story of the fall and rise of inequality."

The statistic that is tracked over time, and which falls and rises during the last 90 years is the percentage share of total income that goes to the Richest ten percent. During the Long Guilded Age of Inequality, the Top 10% got about 45% of total income, but drops precipitously in the late 30s and by the end of World War II we see their share plateau at just above 30% of total income, which is labelled "Middle Class America in the plot. During the 80s and 90s the share oif total income going to the richest 10% is observed to be driving back towards the 45% level of the long-ago vanished guilded age, which may now be returning. Krugman says,

"The great divergence: Since the late 1970s the America I knew has unraveled. We’re no longer a middle-class society, in which the benefits of economic growth are widely shared: between 1979 and 2005 the real income of the median household rose only 13 percent, but the income of the richest 0.1% of Americans rose 296 percent."

As a measure of inequality, the statistic shown in Krugman's graph works superbly to make the usual point: the Rich are getting richer, but are the poor getting poorer? Well yes, but only in comparison to the Rich, but not in absolute terms. I guess it would be more accurate to say that the Rich are getting richer, but so are the Not Rich, only at a slower rate.

The statistic in the historical plot used by Krugman is a tricky one, because the "total income" itself is a very dynamic and changeable number. It is related in a very complicated way I would think to the statistic that is measured and graphed, which is the share of that total income earned by the richest 10% of the population.

Suppose for example there are exactly ten people in an epoch like the "Middle Class America" period when the Richest Person got about 30% of the total income. Suppose one day, one of these ten persons , not necessarily the richest one, invents and sells something that greatly benefits everyone else, for example by cutting the cost of energy or food in half. Such an invention could certainly cause the total income to rise dramatically because of the savings in food and fuel inputs. How should the increase in income now be distributed?

Let us assume for the sake of simplicity that we are a completely egalitarian society such that all economic gains and losses must be shared equally by the Rich and the Poor. Before the invention arrives, the share of the Richest 10% is 30% of total income so we want to maintain that arrangement, more or less. Thus if the invention causes total income to double, we would want everyone's incomes to double and that would not change the Gap between the Rich and the Poor since everyone would have the same percentage share as before.

Now of course the Inventor Person would seem to be unfairly treated, and such a purely egalitarian arrangement would not give him or her any new incentive to reveal a perhaps even more marvelous but difficult invention that could potentially quadruple the total income.

This only means that during times when the total income is rapidly increasing, we should expect this "gap between the rich and the poor" to increase rapidly also, because I think one is actually a measure of the other. This is evident even during the Middle Class America period, which I interpret as follows. After WW2, there was a tremendous economic expansion in the United States as millions of war veterans went to college, established new families ("the Baby Boom") and earned significantly greater income than generations before them. So the "drop in inequality" as measured by the share of the Rich from the long guilded age level which is observed in the Great Compression is really due to large numbers of people greatly improving their income earning capacity. During the ongoing Great Divergence, new wealth of all kind is being created by all kinds of innovative new economic activity...like the revolutionary technological innovations that have forced the New York Times into the Blogosphere.