Economic Status (Part 2)

SOCIAL INDICATORS 2006

Economic Status (Part 2)

The Gini Index is a measure of income inequality. The index ranks income distributions from 0 to 1, where 0 equals equality, and 1 equals inequality. Gini indexes had been calculated for families from 1947 to the present in the US. However, household income is now the preferred indicator, and that data is available from 1967.

The Gini Index declined slowly over the 1950s and 1960s until it reached a low of .388 in 1968. Based on earlier data for the entire century, I suspect 1968 was the low point of the century. Over the past four decades, the rate has climbed to .466 in 2004. That is an increase of 20%. Is that significant? Yes.

The following is a chart that shows the percentage of income earned by the top 1% of taxpayers from 1913-1998.

The Gini Index growth rate flattened out in 2000, and I suspect this chart would show a similar leveling or decline if extended for five more years. The percentages preceding 1913 were likely higher than the 1913 percentage. This indicates that income distribution in the 1950s through 1970s may have been an aberration and not the norm.

Many attribute the rising inequality to the tax cuts implemented by Ronald Reagan in 1981. However, the rise in the Gini index began earlier:

Some estimates suggest the poverty rate in the United States in 1939 was more than 40%. This would undoubtedly have given a high Gini Index. We also know that the Gini Index fell steadily from World War II's end until 1968. The Gini index fluctuated near the 1968 level until 1974. The rate began to grow in 1975 and continued steadily until early 1992, set back only by the 1980 and 1990 recessions. If not for the recession and economic woes of the mid-1970s, the origin of the increase might have been as far back as 1968. The calculation methods for the Gini Index were revised in 1993, and indexes after that date are not strictly comparable with previous years. The period of 1993-2000 shows slower growth and 2001-2004 shows virtually no change.

So why did the Gini Index contract and then grow? Frankly, I don't think anyone knows with certainty. Changes in taxation were not a primary factor.

• After the 1964 Kennedy tax cut, inequality continued to decline for the next four years before leveling off in the following years.
• Ronald Regan cut taxes in 1981, and inequality increased through the 1980s at or above the rate it started in 1975.
• Bill Clinton raised taxes, and inequality kept growing, although at a slower rate.
• George W. Bush cut taxes, and inequality stayed constant.

There is no doubt that taxation impacts distributive inequality, but it is also clear that a host of other factors are involved as well.

Is unequal distribution a problem, and if so, why? Here is a bell curve graph that shows the median household income for each fifth of the US population in 1968 and 2004 (the lowest and highest points of income inequality in the last fifty years, respectively.) The "2004" line shows the distribution of median incomes for each fifth of American society in 2004. The "1968 Adjusted" line shows how 2004 income would have been distributed if the 1968 distribution had held constant.

The chart shows that the poorest fifth would have received $5,000 more, and the wealthiest fifth would have received $32,500 less if the 1968 income distribution had remained constant. Or does it? We know that the wealthiest among us are more likely to save and invest each succeeding dollar than the rest of us. If the money that went to the wealthiest fifth had not gone to them, would it have been saved and invested similarly? Might the poorest fifth have become even poorer? Should we try to reduce economic inequality?

Some economists say no. The growing inequality sends signals through the marketplace. For instance, a gap between high school and college graduates motivates more people to pursue more education, thus improving the workforce. It reduces the number of unskilled laborers, causing the wages for unskilled laborers to go higher. Also, why does it matter that some are becoming very wealthy if everyone is getting better off with rising inequality?

On the other hand, in his book Naked Economics, Charles Wheelan tells of a study by economist Robert Frank. Frank offered people an option of living in one of two worlds: (A) You earn $110,000 a year, and everyone else earns $200,000 a year, or (B) You earn $100,000 a year, and everyone else earns $85,000 a year. Which would you pick? Most Americans chose option B. Relative status is more important than absolute status to much of the population. Great inequality will lead to higher levels of dissatisfaction in the culture.

Furthermore, inequality could reach such high levels that significant numbers of people are discouraged from work and achievement. They would no longer feel they have ownership in the institutions of society and cease to respect them. Maintaining order would begin to become costly, crippling a productive economy.

Too little inequality could hamstring economic growth by diverting wealth from those most likely to save and invest in productive economic efforts. Too much inequality could lead to a breakdown in respect for social order, which would also hamstring the economy. There are dangers in either direction. However, I do not believe we are near either extreme, and our economy continues to grow at healthy rates. Most European democracies with more equality have sluggish economies and higher unemployment and find themselves confronting hard decisions about reductions in government welfare programs. For these reasons, I do not necessarily view our present levels of income inequality as purely negative.

Conclusions:

• Unemployment and inflation rates have been hovering below or just barely above thirty-year lows.
• Median household income has grown by 30% since 1967.
• Since the mid-1990s, the poverty rate has fluctuated in the 11.5-13.5% range, just slightly above the historic lows of the early 1970s.
• The percentage of Seniors living in poverty has dropped below 10%, but poverty for children is nearly 18%.
• Since 1967, the Gini Index of income inequality has risen by 20%, while median household income has risen by over 30%.

The overall economic picture is one of improvement, though it may be less than we might wish. The economic indicators suggest an overall improvement in quality of life.

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Comments

[dlw]

thoughts: things have not gotten worse for most people in material terms, but you gotta be kidding me about lauding a 30% increase in median income over an almost 30 year time period.

You failed to mention that the overall growth rate of the economy was higher prior to the seventies, which means that during that unusual period where income inequality was being regularly reduced was when our economy was doing quite well.

It seems inescapable not to say that Reaganomics exacerbated income inequality.

You fail to mention the import of K street, their reorganization in the early seventies to exert more lobbying pressure and the rise of the religious right seem to be strongly correlated with the turnaround our system has shown.

Long and short, from my pov, the increased influence of $peech on our gov't has been a very bad thing overall for us, as it has also accompanied a hyper-individualism that has been harmful for us spiritually. I do not think that is a coincidence.

I do not trust centrism to extricate us from the present situation. I think we need to continue to reduce the faith-based political acrimony that has been poisoning our democracy and continue to have the political influence tilt economically left and develop a viable third party system(first focusing on state level institutional reform) so that the third parties will force the main parties to be more dynamic in their platforms.

Anyways,

Merry Christmas to you and your family.

dlw

[Michael W. Kruse]

"...lauding a 30% increase in median income over an almost 30 year time period."

I don't know that I was "lauding" this growth but a 30% growth in real inflation adjusted income is not insignificant. There was general stagnation over the period from the early 1970s to 1980s so the growth is really over a period of less than twenty years.

As to the period in the 1950s and 1960s, I think we had a very unusual set of circumstances. During WWII you had a large household savings build because of scarcity of goods available for purchase. Meanwhile, industry retooled and remade itself as it production turned to the war effort. When the war ended you had a surge of experienced and disciplined labor into the market. Pent up demand, cutting-edge infrastructure, people with money in the bank, and relatively inexpensive quality labor set the nation on a growth trend that lasted almost two decades. I began with 1967 because that is how far back the data source went that I was using.

"It seems inescapable not to say that Reaganomics exacerbated income inequality."

I didn't say that it didn't contribute but that the rise began prior to it by about six years. There was something more at work than just Reganomics. However, if you look at the chart in the previous post, median income began to rise about 1983 when Reganomics kicked in. That growth has only been interrupted by the recessions in '91-'92 and in '00-'01. And this gets to my question about the ability to achieve growth in the overall economy without allowing for inequality. The precise nature of the relationship is unclear to me but I think it is there.

“…hyper-individualism…”

“…continue to have the political influence tilt economically left”

I agree with you about hyper-individualism. However, I reject the idea that free market capitalism is the prime source of hyper-individualism. I see it primarily as a product of the Enlightenment/Modernist idol of the autonomous self seeking self-actualization. Proto free-market capitalism predates the Enlightenment and is solidly grounded in the Christian ethos. The economic system is not so much flawed as are the players who bring their Modernist selves into the market place.

I am not in favor of statist solutions to most of our problems. I am in favor of the Church being salt and light in the world who see themselves as stewards of creation and community, and then feeding those values into the most dynamic wealth generating system ever seen. The answer lies with transformation of the Church not economic systems in my estimation.

Merry Christmas to you too!

[dlw]

30% increase over 20 years is still a 1.3% annual increase which a pretty small fraction of the overall pie.

Economic growth slowed during this period, but not by that much.

I agree that the 50s and 60s were unusual, also in part because of our vantage point coming out of WWII. I'd also argue that worker bargaining power was on the increase because of gains made by organized labor, since employers are more likely to raise wages/increase benefits to stave off a unionization threat.

Methinks that is inevitably part of what makes the trickle-down effect actually work. Unfortunately, the imputation of income problem does require some bargaining, in part because a significant source of gains come from advances in basic sciences.

I think we've had both growth and a significant reduction in inequality in the past, yes there were some differences back then, but things weren't that radically different.

One thing that has changed seriously has been the level at which executives have been paid, relative to the entry level or median-paid worker in a corporation. Corporations' performances(the non-inflated or Enronized versions) have not improved significantly since this change and so one can question this practice, though it might be better to somehow get back to the voluntary means by which corporations mediated income inequality within themselves in the pastt.

Free market capitalism does have an impact on values overall. The issue is almost always markets plus frameworks, or the rules of the game. Those early days of capitalism had a better framework than today and were about subverting the control the medieval hierarchy had over "society" in ways that were more meritocratic.

But I don't think this can be seen as "free market capitalism". I think the state inevitably plays a role as where the rules of the game for our economic relations get worked out. Also, all private property inevitably refers back to the owner's ability to get the state's monopoly on the legit use of violence to be wielded on their behalf. There are limitations to the ability of the threat of force to change people's behavior, but it still is present there.

I see the church's command to love our neighbors as ourselves inevitably affecting our participation in the remaking of the rules that govern us apart from(but not per se excluding) our own self-interests.

cheers,

dlw

[Michael W. Kruse]

Great comments dlw. I especially liked your last paragraph. Markets and the shema. Now there is a formula for you! :)