Saturday, September 22, 2007

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.

15 comments:

lcnatabio said...

djb,

i thought you're into the WSJ instead of the liberal NYT.

DJB Rizalist said...

We learn the most from those who disagree, no?

Amadeo said...

What was the latest twist in the Forbes 400? It had to drop many billionaires from the list, not because they got “poorer” but because there are now too many of them to fit into the list.

I stopped reading P. Krugman a while back and thus have not read his inaugural blog. However, correspondingly the boundaries that define what middle class is have also changed. Now, any household earning 150-250K dollars is not considered affluent and many small business owners fall under this category. BTW, in numbers small businesses dominate overwhelmingly big businesses, including numbers in new employment generated.

And thus, if not classified as affluent, where do they belong? I suppose the next lower class, which is middle class.

lcnatabio said...

djb,

hmmnn, that's interesting. I can only venture a guess what exactly that means:

1. the other's side reasoning is more coherent or,

2. you're going back to your original lib dem color.

DJB Rizalist said...

Icnatabio,
It does not sound like you have even read my post. you might find it more interesting than your suppositions, in my opinion.

lcnatabio said...

djb,

that is because you're not refuting Krugman's argument on the same quantitative variable that he introduced i.e., percentage share of total income of the richest 10%.

you are refuting it by introducing another variable i.e., number of people getting rich.

i think they call it, ditching the issue?

DJB Rizalist said...

Icnatabio,
That is because the composition of the richest 10% changes all the time.And the reason it changes is largely their own doing. By creating new wealth, they become entitled to more of that new wealth than those who did not, and will only benefit from the innovation. Thus the question to ask in order to see the point of this post is ten percent of WHAT?

Marcus Aurelius said...

Also we have to factor in the things going on during the years of great equality.

We have the great depression with bread & soup lines that sucked the wealth out of everyone and those already in the lowest rungs of the economic ladder did not improve just because the people at the top were knocked down.

WWII then came along and ravaged Europe and Asia so in the following years there was unparalleled prosperity and growth in the one nation that did not get wrecked by WWII. That nation had its position at the top of the industrial ladder unchallenged until the late '60s.

In any event I see little worth in pointing out income disparity. There will always be people who will build and direct trains (the rich), those who will hop on board and ride along (the middle class) and those who will stay at the depot (the poor).

Does Paul Krugman and his ilk want another economy wrecking depression and world war? Unfortunately, they may have least one of their wishes.

Also, remember the number of billionaires is bound to rise just as it is not that big of a deal to be a millionaire anymore. In fact, the publisher of Forbes ran an article some years ago about his visit to Green Bay and how one would never know by the looks of things how there are a great many millionaires in Green Bay. They live in their original 1100 sq ft houses and drive Fords.

lcnatabio said...

djb,

i agree that creativity and innovation must be rewarded.

but 45% of total income in the hands of the richest 10% is still a social anomaly.

i do not believe that the remaining 90% of the population are less creative and innovative given equal chance and opportunity.

Bill Gates himself did not become a billionaire because of his original innovation. Most of Microsoft's technology was pirated from the brilliant innovators of IBM and Apple.

Tim Berners-Lee would have been a billionaire many times over if he claimed the patent for his invention but chose to share it with the general public instead.

Such spirit of community, the "we're-all-in-this-together" mentality fosters more social harmony than the ruthlessness of the greedy.

DJB Rizalist said...

Icnatabio,
Your point is well taken, but at least you admit that "inequality" is not in and of itself an unreasonable or unfair thing. You are complaining that there may be too much inequality or that the distribution is unfair.

That possibility is always there but that does not deter us from concluding that in some ideal operational sense, the equilibrium point must be decided by a market of supply and demand that rewards not only innovation, but even purely accidental wealth creation, such as when Bill Gates bought a little known DOS for $100 (according to legend).

The point is, you do accept that there has to be some kind of gap, that the ideal distribution curve is some kind of bell curve with a perhaps long tail (sound familiar?) but not a flat line of exactly equal distribution of wealth.

So I ask, what DO you think the ideal income distribution curve should look like?

Amadeo said...

“So I ask, what DO you think the ideal income distribution curve should look like?”

Please let me ask further, with a qualifier: Here on earth, or in heaven (or the afterlife for those who believe)?

In my opinion, that ideal whatever it is can never be attained here on earth. That’s like utopia. Greed and envy are such parts and parcel of man’s genetic inheritance, the most that can be done is curb and control them.

But rest assured, anyway, that in real life, we find the “filthy rich” are typically more generous, altruistic, and sharing of their wealth. Bill Gates and W. Buffett come to mind, with their recent fraternal partnership in the world’s biggest philantrophic foundation.

lcnatabio said...

djb,

"So I ask, what DO you think the ideal income distribution curve should look like?"

For sure, in a dynamic society free riders should not be encouraged but tapering the fortunes of the fortunate to the 20-30% level might suffice.

The "hoi-polloi" must be given enough leverage to labor for wealth creation so the "idle rich" can have their vacation.:-)

DJB Rizalist said...

It's a valid political and mathematical question. We know it is not a flat line of total inequality. but I suspect it is a far more subtle and complex question than we think.

I highly recommend the book ,A Theory of Justice by John Rawls, for the purpose of exploring the issue further, should anyone care to.

lcnatabio said...

amadeo,

1. i do not believe in a celestial heaven. we create our own heaven (or hell) here on earth.

2. utopia is an ideal to be striven after. it may not come in our lifetime as for sure mankind still has several millions of years ahead in its lifespan to figure out a way in bringing it out.

3. the selfish gene theory of dawkins is confined to the beasts and lower forms of life. Man, because he is gifted with reason and higher consciousness, is capable of conscience and ethical/rational behaviour.

evolution, on the level of man, proceeds towards greater refinement and unanimity (convergence).

4. the altruism and generosity of the "filthy rich" is as suspect as to say that ilocanos are essentially "frugal".

lcnatabio said...

transpose this inequality thing to our own shores and it takes on a totally different texture.

the riches our "filthy rich" enjoy are not necessarily out of creativity and innovation.

it's either a product of rent seeking or oligarchical impositions.