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  • Stats You Can Use

    Posted by Ginny on March 2nd, 2006 (All posts by )

    In “Rich Man’s President? Look Harder”, David Mastio looks at family income stats from the Federal Reserve.

     

    15 Responses to “Stats You Can Use”

    1. Shannon Love Says:

      Funny how this works out. I like to surprise people by pointing out that tax burden grew steadily more unprogressive during the late 60’s and through the 70’s and only reversed after Reagan’s tax reforms in the early 80’s. The wealthiest 20% paid a significantly higher percentage of total taxes after Reagan’s changes than before.

      Despite this easily verifiable fact, many people think that Reagan screwed the poor for the benefit of the rich. Strange. I imagine the same dynamic is occurring here.

    2. Mark Says:

      It’s the ultra-rich that are making out nicely, not the top ten percent. Between 1972 and 2001 the 90th percentile of the income distribution only rose 34 percent. But check out the 99th percentile +87 percent; 99.9th percentile +181 percent; 99.99th percentile +497 percent. Rising oligarchy?

    3. Knucklehead Says:

      Mark,

      Please share your source for family income data broken down to hundredths of percentiles.

    4. Shannon Love Says:

      Mark,

      Rising oligarchy?

      More likely your seeing the normal fluctuations that occur at the far end of the bell curve. As the population shrinks it takes only a few individuals striking it big to skew the entire percentile. The 99.99th percentile for example is composed of only 30,000 people. Bill Gates alone could skew a group that small.

      The other difference is that calculating the income of the super-Rich is a tricky business and is highly sensitive to tax policy. You might remember that back in the 1970’s there was three years when Malcom Forbes, then the world’s riches man, paid no income tax because he had no net taxable income according to the laws of the time. Reagan’s simplification of the tax code caused a lot of income to magically appear because it was easier to pay the full tax at a lower marginal rate than it was to try to shelter it under the higher rate. 1972 was also the year that high inflation began, so you have to adjust all the figures from then to 1981.

      You should have no fears of oligarchy in any case because the people in the 99.99 percentile in one year are not the same as in the next. The turn over at the upper levels is very high. The super-wealthy are not a distinct and self-perpetuating group but rather a statistical demographic whose members are continually changing.

    5. Jonathan Says:

      Right, these income stats are mere snapshots rather than permanent-status markers. There is a lot of turnover in the population of each category. Some of the people who are in the highest-income category now were in the lowest-income category a few years ago and vice versa.

    6. Shannon Love Says:

      Since the discussion is actually tax fairness it should be noted that (1) the Wealthy individually pay a much higher percentage of their income in taxes and that (2) collectively they pay the majority of all income taxes. The top 10% of tax payers pay about 65% of all income taxes in any given year. (which is up several points from what they paid in the 70’s, hence the more progressive nature of the post-Reagan tax structure).

      Note that the 99th percentile starts at around $300,000 (on which they would now pay a income tax of $105,000) and is comprised of fewer than 3 million individuals. I’m not sure were the 99.99th percentile starts but its probably only a few millions. A few billionaires would skew the whole group.

    7. Knucklehead Says:

      Oligarchies of 30,000 members a significant portion of whom gain and lose membership each year. Heh, anything is possible.

      I’m looking at this CNN/Money article, Return of the millionaires:
      Report says number of new millionaires jumped 14% in 2003 as the U.S. emerged from recession
      from June of ’04.

      We start by learning that, according to the Merrill Lynch/Capgemeni survey released at that time, that the number of US millionairs (defined as those with $1 million or more in investment capital excluding home equity) jumped 14% from 2002 to 2003 and stood at 2.3 million. Clickety-clacking says that means there were 2.02 million “millionaires” in 2002.

      Next we learn that the number of millionaires dropped by 100,000 in 2002 (presumably from the 2001 number). That suggests that there were 2.12 million millionaires in 2001 although the article does not say so. If I’ve surmised correctly, however, that suggests that between 2001 and 2002 the number of US millionaires decreased by 5%. Between 2001 and 2003 the increase was 8%.

      That’s a large and volatile sub-oligarchy. Of other interesting note in the article:

      Worldwide, a half a million individuals joined the millionaire’s club, which topped 7.7 million. Their overall wealth topped $28.8 trillion, a jump of 7.7 percent over the year before.

      The United States produced the most new millionaires but Hong Kong, at 30 percent, and India, at 22 percent showed the largest percentage gains. China, with a 12 percent jump in millionaires, was right behind the United States.

      Europe’s elite grew more modestly; the number of new millionaires there climbed just 2.4 percent to a total of 2.6 million.

    8. chel Says:

      David Mastio ends his piece asking “how a President elected with overwhelming support among whites and a mandate for tax cuts skewed to the rich managed to produce an economy that favors the poor and minorities.” Jeepers, is he actually claiming that an economy where the “bottom 20%” experienced only a $100 increase in family income between 2001 and 2004 is an economy that favors the poor?? Ouch! In 2004 the median income for a family in this lowest category (bottom 20%) was only $11,100. For a family! Egad, the poor haven’t done too well during the George Bush presidency.

    9. Shannon Love Says:

      Chel,

      One problem with all this data is that it is based on income taxes which does not accurately reflect the totality of all the economic exchanges going on. For example, medical benefits provided by employers are not taxed. As a greater percentage of compensation(the total that employers pay for each employee) comes in the form of untaxed benefits it makes it look like wages are not rising when in fact they are.

      Real wealth is actual measured not in income but in assets and Matiso points out that the growth in assets in the bottom quintile is significant. Net worth rose enormously for the bottom quintile and only marginally for upper quintile. I suspect that much of the gain in income by the upper quintile seen under Bush is actually the result of the wealthy individuals selling off assets.

    10. chel Says:

      Hi Shannon,

      I agree that income does not reflect the totality of all the economic exchanges going on. Sadly though, families who bring a $11,100 are likely not collecting much of any benefits from their employers.

      Additionally I’d like to point out Table 3 on page A8 where David Mastio got his numbers for the final chart in his essay. Mastio chose to report mean values, which as you mentioned earlier in this thread, means are vulnerable to skewing by outliers. If you look at the median values from this very same table 3 in the report, the bottom 20% *decreased* in net worth between 2001 and 2004 by 11% ($8,400 in 2001 vs. $7,500 in 2004.) On the other hand the median net worth of the top 10% *increased* by 4% in the same timeperiod ($887,900 in 2001 vs. $924,100 in 2004.)

      Mastio is just plucking the numbers from the report that agree with his thesis and disregarding the others. I think Ginny should change the title of this post to the title James used in his most recent post.

    11. Mark Says:

      Knucklehead, the source is: Ian Dew-Becker and Robert Gordon (Northwestern University) “Where did the productivity growth go?”

      For comparison, note the observations of Stephen Roach of Morgan Stanley:
      Global: Globalization’s New Underclass

      Stephen Roach (New York)

      Billed as the great equalizer between the rich and the poor, globalization has been anything but. An increasingly integrated global economy is facing the strains of widening income disparities — within countries and across countries. This has given rise to a new and rapidly expanding underclass that is redefining the political landscape. The growing risks of protectionism are an outgrowth of this ominous trend.

      It wasn’t supposed to be this way. Globalization has long been portrayed as the rising tide that lifts all boats. The surprise is in the tide — a rapid surge of IT-enabled connectivity that has pushed the global labor arbitrage quickly up the value chain. Only the elite at the upper end of the occupational hierarchy have been spared the pressures of an increasingly brutal wage compression. The rich are, indeed, getting richer but the rest of the workforce is not. This spells mounting disparities in the income distribution — for developed and developing countries, alike.

      The United States and China exemplify the full range of pressures bearing down on the income distribution. With per capita income of $38,000 and $1,700, respectively, the US and China are at opposite ends of the global income spectrum. Yet both countries have extreme disparities in the internal mix of their respective income distributions. This can be seen in their so-called Gini coefficients — a statistical measure of the dispersion of income shares within a country. A Gini Index reading of “0” represents perfect equality, with each segment of the income distribution accounting for a proportionate share of total income. Conversely, a reading of “100” represents perfect inequality, with the bulk of a nation’s overall personal income being concentrated at the upper end of the distribution spectrum. In other words, the higher the Gini Index, the more unequal the income distribution. The latest Gini Index readings for the US (41) and China (45) are among the highest of all the major economies in the world — pointing to a much greater incidence of inequality than in economies with more homogeneous distributions of income, such as Japan (25), Europe (32), and even India (33).

      While the US and China suffer from similar degrees of income inequality, they have arrived at this point through very different means. In the case of the US, there is nothing new about elevated readings of income inequality. America’s Gini coefficient has been on the rise for over 35 years — moving up from about 35 in 1970 to over 40 today. What is new is how America’s income distribution has become more unequal in a period of rapidly rising productivity growth — a development that has been accompanied by an extraordinary bout of real wage stagnation over the past four years. Economics teaches us that in truly competitive labor markets such as America’s, workers are paid in accordance with their marginal productivity contribution. Yet that has not been the case for quite some time in the US. Over the past 16 quarters, productivity in the nonfarm US business sector has recorded a cumulative increase of 13.3% (or 3.3% per annum) — more than double the 5.9% rise in real compensation per hour (stagnant wages plus rising fringe benefits) over the same period.

      I don’t think it’s a coincidence that the relationship between productivity growth and worker compensation has broken down as the forces of globalization have intensified. First in manufacturing, now in services, the global labor arbitrage has been unrelenting in pushing US pay rates down to international norms. But the real wage compression in the US has not been uniform across the income spectrum. In large part, that has occurred because increasingly broad segments of the American labor market are now exposed to a uniquely powerful competitive force — the IT-enabled arbitrage. Courtesy of the hyper-speed of sharply accelerating Internet penetration, the global labor arbitrage has pushed into areas that historically have been unaccustomed to wage competition. In earlier research I found that the disconnect between compensation and productivity growth during the current economic expansion has been much greater in services than in manufacturing. This once nontradable segment of the US economy is now feeling the increasingly powerful forces of the global labor arbitrage for the first time ever (see my 8 July 2005 dispatch, “Back to the Drawing Board”).

      The Internet has forever changed the competitive climate for most white-collar knowledge workers. Courtesy of near-ubiquitous connectivity, the output of the knowledge worker can now be e-mailed to a desktop from anywhere in the world. That brings low-cost, well-trained, highly-educated workers in Bangalore, Shanghai, and Eastern and Central Europe into the global knowledge-worker pool. That’s now true of software programmers, engineers, designers, as well as a broad array of professionals toiling in legal, accounting, medical, actuarial, consulting, and financial-analyst positions. Within this global pool of like-quality workers, a powerful arbitrage acts to narrow wage disparities. As a result, real wage compression in open economies like the United States has moved rapidly up the value chain — sparing an increasingly small portion of those at the very top of the occupational hierarchy. In short, the IT-enabled global labor arbitrage is a guaranteed recipe for mounting income inequality. Washington’s penchant for cutting taxes of the wealthy probably hasn’t helped matters either.

      In China, it’s a different story altogether. China remains very much a tale of two economies — a booming development model at work in the increasingly urbanized coastal part of the nation in stark juxtaposition with relatively stagnant economic conditions persisting in the rural central and western portions of the country. While fully 560 million urban Chinese are now participating in the economy’s rapid development dynamic, that still leaves a rural population of some 745 million on the outside looking in. Interestingly enough, the accelerating trend of rural-to-urban migration has done little to arrest the inequalities of the Chinese income distribution over the past 15 years. This is somewhat surprising in that urban per capita incomes in China (US$1,531 in the top 35 cities in 2004) are slightly more than three times those in rural areas ($488). But the increase in China’s overall Gini Index from 35 in 1990 to 45 in 2003 not only reflects the impacts of an ever-widening income disparity between coastal China and the rest of the nation, but it is also a function of the increased divergence in the distribution of urban incomes. On this latter point, a recent report of China’s Academy of Social Sciences notes that average incomes in the bottom quintile of urban Chinese workers are less than 5% of average incomes in the upper quintile.

      Significantly, Chinese income disparities in the Internet age may well have a very different connotation than in the past. With increased IT connectivity in western and central China — mainly in the form of the village kiosk — the rural poor now have real-time access to the “outside world.” This gives them a very vivid picture of the prosperity they are missing. In that vein, the Internet has the potential to spark resentment and social instability in China’s two-track development model — the very last thing the government wants. The Chinese leadership is very focused on the income distribution issue, and is expected to make this a major topic of debate and policy action at the upcoming National People’s Congress. That campaign has already begun. On 21 February, a “new socialist countryside” program was unveiled jointly by the State Council (China’s cabinet) and the Communist Party — focused on providing increased support for farmers together with improved education and healthcare for the rural population. The plan also gives special attention to the role of finance in stimulating rural development, especially through increased bank lending to farmers, along with increased private incentives for investments in rural credit cooperatives. This multi-year initiative is aimed squarely at the income distribution issues noted above.

      As different as the problems are in the US and China, there is no economic issue in either country that hits the political hot button like income disparities. And with both countries suffering from relatively high degrees of inequality, neither can be expected to backtrack insofar as the political response is concerned. Given the mounting bilateral trade tensions between the two nations, this poses a worrisome problem: America’s increasingly populist politicians have responded to the income distribution problem by turning protectionist — portraying China as the culprit for the pressures bearing down on middle-income US workers. Even if this view is dead wrong, as I continue to believe is the case, for China, there seems to be no immediate escape from the growing political wrath of Washington (see my 24 February dispatch, “Saving Tensions and the Protectionist Backlash”).

      China, on the other hand, continues to cling to an export- and investment-led growth dynamic that not only fuels political resentment in the US but also seems to have a natural bias toward widening disparities in its income distribution. Yet this same approach drives the vigorous employment growth that is absolutely vital in order to provide China with the scope to keep dismantling its inefficient state-owned economy. The Chinese leadership knows full well that this is not a sustainable growth formula. Its recent focus on stimulating private consumption and services is a clear recognition that a new recipe is needed. But this will take time — and quite possibly a good deal of it. Meanwhile, China is engaged in a very delicate balancing act between reforms, which seem to be exacerbating income disparities, and externally-focused growth, which seems to be evoking a protectionist backlash. In response, the Chinese leadership is turning to the micro management techniques of market-based socialism for answers — namely, a gradual shift in its currency policy to diffuse external pressures and targeted income support measures to counter internal pressures. Only time will tell if this is the right approach.

      Inequalities of the income distribution have long been the Achilles’ heel of economic growth and development. In an era of IT-enabled globalization, that seems more the case than ever. History tells us that the pressures of widening income disparities are often vented in the political arena. The steady drumbeat of protectionism is a very worrisome manifestation of that lesson. To the extent the risks of protectionist actions come into play, the US dollar and real interest rates would probably bear the brunt of the financial market response.

    12. LotharBot Says:

      ” In short, the IT-enabled global labor arbitrage is a guaranteed recipe for mounting income inequality.”

      It seems to me like this would be a guaranteed recipe for a one-time jump in income inequality, not a long-term increase. We’ve essentially increased the size of the labor pool, and doing so will drop wages in the most competitive jobs (increasing the supply of labor decreases the cost!) But unless we continue to increase the supply of labor, there should be no further increase in income inequality.

      Though, IMO, income inequality is irrelevant. The only thing I care about is how the people on the bottom are doing. Not how they’re doing relative to Bill Gates, but how they’re doing relative to how they (as a group) were doing 5 years ago, 10 years ago, 20 years ago. Does their lot continue to improve? For the most part, the poor I know (in the US) are better off than the poor I knew when I was a little kid — they have adequate food and shelter, cable TV, computers, internet access, ipods, etc. And this is people living on SSI/SSDI or minimum wage… those living on slightly higher incomes are much better off than those in the same position 20 years ago.

    13. Ginny Says:

      LotherBot,
      I find your approach attractive – and actually, one that discourages coveting other’s goods and encourages us to enjoy life.
      Target’s style & WalMart’s prices are important: both give an enjoyable and even stylish life at less cost and in revealing among certain theoretically “caring” elitists a desire to emphasize differences rather than similarities (much as some of these same people want to emphasize ethnic/racial/gender differences rather than the universals that bind us together). They can’t condescend well if their coffee tastes the same and their shirts fit the same as those some illegal immigrant or McDonald’s worker picked up for a night on the town.

    14. David Mastio Says:

      Dear Chel,

      If using the mean for every single statistic in my entire article is cherry picking, your command of English needs a little work.

      As for the end of my piece, I am sorry you missed the irony. Lefties spend all their time lamenting that the rich are getting richer RELATIVE to the poor. If the richest 10% have declining incomes and the poorest 20% have slightly rising incomes then the much bewailed “gap” is shrinking and that must be good.

    15. chel Says:

      Hi David,

      Please re-read this thread. I you have any questions about the difference and the appropriate uses of means versus medians, I’m sure either Shannon or I would be happy to explain.