The Income Distribution Hoax, Part 1

Terrible post.

Good post. I think some of the income distribution can be explained by the fact that more women are being educated too. There are many more women with advanced degrees (doctor, lawyer, accountants, and other high paying jobs) than there was in the past. When you figure that probably marry a guy that is educated and earning a decent income then those families will probably earn a lot more than 1% families of the past. Also divorce rates are lower among people with more education and that get married later in life compared to less educated people who get married earlier. These forces I think can explain a lot of the reason why the top whatever percent you look at has more of the income than the top percent had before. Just don't expect facts and reasoning like this to enter the political discussion anytime soon.

Good analysis

Garbage Post.

Go back to masturbating to Blankfein.

Do post I think you hit the nail on the head. It is not good enough for the top 1% to create jobs for and cheaper items for the normal American consumer so now the Washington wants to tax the top 1% even more. This drives down the for some of America's smartest people to create innovative products because the government is lurking and waiting to take a huge chunk of the income the product produces.

Tax laws that tax earned income at 50% and dividend income/capital gains/carried interest/corporate profits at lower rates will skew the data. Get rid of the different income classifications, bring in one flat tax on all income of 10% with no loop holes or deductions, exclude those below the poverty line and bob's your uncle

I want you to try holding a complex thought in your head: parse out wealth vs absolute wealth. The bottom line isn't the material goods themselves so much as the fact that power/freedom is enjoyed in increasing disproportion...

double post

It goes way beyond that. The economic schools of thought that sprang up circa 1880 - 1940 were merely the mechanics of something that has gotten lost and has recently been returned to its rightful place, front and center: AMERICA IS ABOUT FREEDOM. It's not about money, power, control, ideologies or all the other crap that's been pumped into the public's mind for the last generation or so.

The whole point of coming to America is to be free to live your life as you please. Market mechanics, social movements, and all the rest are to be subordinated to this idea. If using the government's power in an area produces more freedom for more people, then do it. If letting markets run a certain area has a better net contribution, then let them. The ideologies, including Austrian, Keynesian, conservative/liberal, and all the rest are merely subsets of the larger set of principles laid out in the Constitution, and should serve that end. When a myopic understanding of the world causes people to treat them as dogma, then everything starts to go wrong.

^^^^ True, but the US takes a more deontological than utilitarian approach to freedom. We would not, for instance, kill Bill Gates to save 100,000 US citizens being held hostage in Iran.

But if we can argue that taxing the rich increases their own freedom, suddenly we have justification. The argument in the '30s was that if we don't tax the rich, we are going to face a socialist revolution like Russia. The argument today is that if we don't tax the rich, we will wind up like Greece (where only 15-20 millionaires paid taxes last year).

Inequality in and of itself isn't really that bad. The problem is when it's used to enslave everyone else, either in prison, by working them to death (regardless of the material payoff), or in the case of the last few decades: intellectual slavery to political religions. The cool part is that there are a lot of solutions, and graduated taxes are one small part of running things effectively...

The "American Dream" has many variations depending on time period, demographic, etc... but I'd like to point this out: In the broadest possible sense, people go to Singapore to avoid taxes. They go to Europe for the social programs. They go to the Islands to party.

But they come here for the opportunity to chase their dreams, to live their life as they see fit.

Good post, but then the Malthusian in me doesn't necessarily want more people coming here. Freedom tends to be inverse to population. You see that in the rules and regulations of NYC (bracketed air conditioners, motorcycles getting stopped and inspected for their exhaust noise, $110 parking tickets, etc. etc.) vs. rural New Hampshire.

I agree that America is a more free and stable country when we have a "reasonable" income distribution, and sometimes the feds need to step in and work stuff out.

Soon the US will be a net exporter of oil. We are already net exporters of natgas. We have always been a net exporter of grain. We control 70% of the world's non-arctic freshwater. (The Great Lakes)

The rich have to do business here if they want our resources. They have no alternative. You cannot make plastic out of air; you cannot power a manufacturing plant on innovation. You cannot feed people on ideas. Europe may very well be turning into Easter Island, Asia has people but can barely feed them let alone provide the resources for factories, and their rule of law is a little sketchy; the US, Australia and Canada are the only real places to invest, and we have the lowest tax rates. So if we want to raise taxes, we can. We just also need to enforce some control over the export of our resources.

I learned nothing by reading this post. A tip to the author, analysis that is to be taken seriously should not be openly partisan. The pretentious tone of faux surprise at your own rhetorical questions ruins the post.

Okay so the only things you proved are:

1. in three decades, real disposable income in the bottom quintile increased 18 percent

2. In the same period, the top fifth increased real disposable income increased by 65 percent.

Which leads me to two question: How does this not prove the point that wealth distributions are widening and that "the political game is afoot?"

Thanks to everyone who commented, including my critics. Good point, MiddleofNowhere. Women getting more education, staying in the job market, and marrying men is similar education and skill levels might stretch the income share in the upper quintile, and even 1%. This is compatible with different demographic explanation I will offer in part 3 of this series.
Warren Graham is right that raising marginal tax rates for upper income innovators ends up being counterproductive. In the long-run it hurts even the poor by suppressing the sort of productive acts he mentions. Going even further, Ovechkin08 is exactly right, I think, that we need a flat tax of no more than 10%, with no exemptions or deductions. Milton Friedman once estimated that such a tax would raise as much revenue as the government was getting from all its distortionary, progressive taxes at the time. Besides, as late as 1900, all federal expenditure totaled only 5% of GDP, and it had been much lower before that. By 1929 (after reaching high levels during WWI) it had actually declined to about 2.5% of GDP. Nowdays it is about 23% or more. I can’t agree at all with IlliniProgrammer’s assertion that the rich don’t spend their incomes (yes, they save higher percents of their income, and invest more, but investing is a form of spending, the most productive form), or that printing lots of money will do any good in our current situation (we’ve been trying that, and it has done no discernable good). He and UFOinsider have an interesting side discussion that I will just leave to them. As for wall12345s second question, I believe parts 2 and 3 will provide surprising answers.

can’t agree at all with IlliniProgrammer’s assertion that the rich don’t spend their incomes (yes, they save higher percents of their income, and invest more, but investing is a form of spending, the most productive form), or that printing lots of money will do any good in our current situation (we’ve been trying that, and it has done no discernable good). He and UFOinsider have an interesting side discussion that I will just leave to them. As for wall12345s second question, I believe parts 2 and 3 will provide surprising answers.

I think there are a lot of deflation concerns in the market right now. Equities aren't performing all that well, and commodities are getting awfully cheap, with WTI approaching $80/barrel- a good signal for ~$2.50-3.00/gallon gasoline in the future. The low CCI and high USDX support this view on a fundamental level. I think the view that we're facing deflation- and that deflation is going to cut into the income of the wealthy- is more than just an assertion; it's born out in some of the market metrics. Like it or not, everyone agrees that Monetary Keynesianism helps fight deflation if you literally print fiat currency and spend it. I think a moderate printing route is a bit safer because you don't contribute to the risk of a debt crisis and the market gives you negative feedback signals via inflation sooner than with debt.

If you want to create demand for consumer goods, give consumers money to spend. Given the strong dollar and weak commodities situation right now, we have some room to do this.

Income redistribution through taxation- The U.S. didn't even have an income tax until 1916 and the ratification of the 16th Amendment. We existed and thrived as a country for 140 years without one... consider that for a second.

Wealth and the attainment of Absolute wealth is a function of several contributing factors and not limited to the idea that the only means of preventing the latter is through confiscation and subsequent redistribution. Fiat monetary systems (implemented 1934 through 1974) and ultimately anti-competition legislation and regulation all contributed to a scenario that allows for the possibility of absolute wealth. The manipulation of preventative measures result in barriers to entry and impede upward mobility for those whom benefit for the redistribution who by nature of their status lack disposable income and thus feed the formerly distributed income back into the hands of those from whom it was taken.

Not an expert on Keynes. But, I will say, to call current economic policy Keynesian is an insult to Keynes. Keynes policy is to spend through economic lulls and maintain during economic expansions. Not expand during both.

^^^ Yes, and not coincidentally, for 140 years, the US also had a frontier. Then that ended. The frontier created opportunities and freedom. Without the ability to head off to Illinois or Iowa or Kansas or Wyoming and claim 40 acres of land (which now costs $8000/acre, btw), there's fewer opportunities for the poor and middle-class to get ahead.

The $64,000 question (actually, now I guess the term is $1 million due to inflation) of the past 100 years is how do we balance maintaining a strong semblance of capitalism while helping to maximize aggregate freedom?

I think there's four things we need to do:

1.) Use incentives to try and limit population growth among the welfare class and those who pay in less than they receive. CC: Singapore in the '60s and '70s. 2.) Have a heavy estate tax, while exempting charitable giving. 3.) Make it harder to export raw materials and commodities to help reduce the opportunity for tax arbitrage and make American exports cheaper. 4.) Keep the moderate but progressive tax system that we have had from 1981-2008 of 30%-50% top marginal tax rates.

Capitalism is a fundamentally important component of freedom, but I'm with UFO on the idea that America stands for freedom first. A country where people are working for pennies per hour and barely able to feed themselves and their families is not really a free country. IMHO, MADD, seat belt laws, the war on terror, and government paternalism are still much bigger threats to libertarianism than moderate Bill Clinton-style liberalism.

Illini - the simple answer to your question is to make the emphasis in the legal system favorable to smaller businesses as opposed to letting the big guys buy out the mob's, er, government's, protection. Very few industries lend themselves to being highly centralized, and such a state is maintained by the legal framework created by the prevailing political will.

Capitalism is very simple: save money and reinvest. The perfect example of the political system is propping up the banks...such a state would not be possible without government backing. It's an issue of vision, the mechanics exist for a broad spectrum of possibilities.

The US is the richest country in the world.

Yes, america has a high amount of "rich." The top 1% hold 44% of the worlds Assets. America has the 27% of the worlds top 1% of wealth holders, with 12 Million people in America being the top 1% of wealth holders worldwide. America has 34% of the "Dollar Millionaires" Worldwide.

But, to count in the wealthiest half of the world, an adult only needs $4,200 in Net wealth (assets - debts). The top 10% holds 84% of the worlds assets, and to qualify, you need $82,000 net wealth.

The average american's median net wealth is $52,752, (considering debts of USD $59,000 per adult, conservative with the rest of the world).

Compared to the wealth distribution in the rest of the world, the US distribution has a high proportion of the population with wealth above USD 100,000, at 36.3% of the country (and 21% of the total worldwide proportion). Only 9% of the world hold this amount of wealth worldwide.

A further 34.4% US citizens have wealth between 10 000-100 000. Only 13.9% of american adults have a net worth of less than 1,000, and 29% total hold less than 10,000, compared to about 60% of the worlds population.

Yes, Americans do have a large level of wealthy individuals, as they have by far the greatest number of members of the top 1% global wealth group, accounting for 41% of those with wealth exceeding USD 10 million and 32% of the world’s billionaires.

But as someone mentioned, there is a relationship between wealth and age, with a hump shape (rising wealth until retirement), and often age is not factored into these models. The thing that irritates me is that a 21 year old kid fresh graduated from college shouldn't expect to be part of the 1%, and have same net worth as everyone else in america, yet he goes and protests like he does. And someone who spends all their money on drugs and cigarettes and fashion and heaven knows what else, and doesn't invest or save anything, also receives little sympathy from me.

Yes, I support government health care, and pensions, and think that aspect of America needs to be looked at. But honestly, very few people in the US have any reason to complain, perhaps 13%, compared to others. But they would do better to do something about it, use it as motivation to go makes something of themselves, then sit back and winge. The current standard of living in the US higher than most throughout history.

Oh, and in america there is a high degree of wealth mobility. I remember the Wall Street Journal did a study on it a few years back, there's lots of people are swapping from upper, middle and lower classes. It's not perfect and I can't remember everything, but I think about 80% of people swapped "classes" between 40 years or so (1960 compared to now?). The 1% is often less then a generation away for most.

https://infocus.credit-suisse.com/data/_product_documents/_shop/323525/… Nt: All figures for adults.

To IlliniProgrammer: we are way off topic, but I guess that is okay. First, I don't think it makes much difference whether American investors invest here or overseas. Investment here, in new capital that employs people or in R&D generating new or improved products or more efficient processes of production benefits Americans, but so does investment by Americans overseas. We are the primary market for the inexpensive products generated by such overseas investments, and our investors and stockholders gain from the repatriated incomes generated. Plus, for the sort of reasons I explained in my very first post on WSO (the Sawyer Syndrome) overseas investments, generating income for the foreigners employed, do not alter overall employment here (though it may alter the pattern).

As for the deflationary pressures we are currently experiencing, you are right that they exist (why they came to exist is too long a story to tell here). The solution is not Federal Reserve money creation, however, but deflation itself. All the Fed has to do is keep the nominal money stock from declining, and falling prices will increase the purchasing power of each dollar until the purchasing power in everyone's cash balances - the real money stock - rises enough to reestablish demand for goods and services. This is known as the real balance effect. Even more important is that wage rates also be allowed to fall. The reason we have abnormally high unemployment is precisely that in too many labor markets the real wage - the ratio of wages to prices - is too high (above the marginal product of labor). Nominal wage rates need to fall in those labor markets by more than product prices, so that the real wage can fall to employable (market clearing) levels, at which point they would stop falling. You should consider the fact that for 35 years following the Civil War prices fell, yet this was a long period of extremely rapid economic growth, both gross and per-capita (there was also deflation over much of the 19th century before the Civil War, but that is another long story).

Thanks to the rest for your comments. Particularly ragnar danneskjold (isn't that a name of a historical figure? I've heard it somewhere), good comment. I agree with most of it. You are off by three years on when the 16th (income tax) amendment passed. It was in 1913, but most people would not even know the decade. Can you imagine that for that great a portion of U.S. history Americans did not have to pay an income tax? No wonder people could reinvest at the rates they did and the economy could grow so fast and make even poor Americans better off, along with the rest.

Also, Mr. aimez has some interesting data, and is right about income mobility. Number 2 and 3 in this series focus on that, so read on, monkeys!

To IlliniProgrammer: we are way off topic, but I guess that is okay. First, I don't think it makes much difference whether American investors invest here or overseas. Investment here, in new capital that employs people or in R&D generating new or improved products or more efficient processes of production benefits Americans, but so does investment by Americans overseas. We are the primary market for the inexpensive products generated by such overseas investments, and our investors and stockholders gain from the repatriated incomes generated. Plus, for the sort of reasons I explained in my very first post on WSO (the Sawyer Syndrome) overseas investments, generating income for the foreigners employed, do not alter overall employment here (though it may alter the pattern).

The real problem is that the planet cannot sustain six billion people on the US's standard of living. There is not enough oil, freshwater, grain production, etc. However, there is enough food, oil, grain, etc. in the US to sustain 300 million AMERICANS on that lifestyle. So we can either let the middle-class starve, or we can focus on keeping the US's resources in the US and fully utilizing those resources here.

You should consider the fact that for 35 years following the Civil War prices fell, yet this was a long period of extremely rapid economic growth, both gross and per-capita (there was also deflation over much of the 19th century before the Civil War, but that is another long story).

Sit in on a poly sci 101 course if you can. Also, cool it on the doomsday stuff. If we're here after December of this year, we're going to need real solutions...

In a resource-constrained world like the one we live in today, resources are ultimately what creates jobs. Control the resources, and you control where the jobs go. For the past ~40 years, our resources have been going overseas, so that is where the jobs have been following. But if we limit the export of resources, we keep jobs here, we raise the cost of doing business abroad, and we give the middle-class a much-needed boost.

Why is it that the world's largest agricultural countries- the UK, Australia, Canada, and the US are also some of the world's wealthiest? All of them have fairly different political systems with some being social democracies while others are laissez-faire capitalist. As long as property rights are generally respected, (AKA not Russia or Argentina) wealth comes down to resources, and the control of their export, not political systems.

Well, IlliniProgrammer, we're still way off topic, but you are an interesting and intelligent guy, so here goes. (1) In saying that the primary market can't consume all of the goods as things stand, and hence we need Keynesian monetary expansion, it is clear that you understood nothing I said about deflation and the real balance effect. I won't repeat myself. You can go back and read it again.

(2) Your Malthusian assumption that the planet could not sustain six billion people at the American standard of living is almost certainly wrong, for a number of reasons. What is relevant for supplying a given population at a given living standard is not the total amount of atoms of various natural resources in existence. That is huge beyond imagining. What is relevant is the amount that can be found and extracted economically (at a profit), and that amount expands with knowledge and technology. It is the very nature of economic growth that it involves (among other things) improvements in that knowledge and technology. Malthusians have been predicting that we would soon run out of this or that resource since before the 20th century, and they have always turned out to be wrong when the run-out date is reached. Just see how wrong the Government's Global 2000 report was, for example. Since OPEC was formed around 1969, they have been pumping about 34 million barrels per day out. Yet known, extractable reserves in OPEC nations are now twice what they were when OPEC started, due to improved technology and discovery of new fields. As China and India grow, and their technology improves (or they let U.S. or British firms come look) they too will discover natural resources (perhaps like our Bakken Field). (3) As for the 35 years after the Civil War being a bad time for investors, I doubt that was true for more than certain subperiods, and even if it were true for the whole 35 years, it wouldn't touch my argument. Every index of American well-being improved at a rapid rate. Real income per capita rose rapidly, life expectancy rose rapidly, the average number of hours per day and per year people worked fell so that their free time rose along with their real incomes. It is always the case that in times of economic growth, some sectors may be having problems while others exceed the average. None of that denies the trend.

To UFO Insider, who adds that there was widespread drug addiction in the post-Civil War period, so what? We have lots of that now, with lots of Keynesianism. And don't get me started on Global Warming. You don't want to go there.

Dude, offshore drilling has just started to delve into uncharted territory and the finds are HUGE. Planning for scarce resources, and maximizing efficient and reasonable usage are definitely priorities, but they should stand on their own merits as ends and not be subject to abritrary and fictional theories on the limits of growth. I definitely think that lifestyles should and will be scaled back as competition for resources intensifies, but I'm pretty optimistic about technology will continue to contribute to improvements.

As for the original subject, income disparity is widening and if the saying 'voting with your dollars' is to be a practical implementation, well then, the people getting richer faster kind of have more power, wouldn't you say? How long before that becomes a problem? A quick look at history makes abuse of power and negligent leadership a hop skip and a jump away...and the ensuing chaos is usually a bummer.

Personally, I can retreat to a remote wildnerness hideout stocked with guns and food, but I like civilization and would prefer to see it maintained well.

Looking at the US's history, I'd say that's about what we've done. Honestly, I think you're looking at things through the lens of one author as opposed to many. I don't think it's possible to have everyone to live the American lifestyle, but I think there's more than enough to keep most people happy in this world.

IP is going to start using more of them fancy words when he gets to Princeton and I ain't gonna have no idea what he's talking about.

We invaded a country and occupied it for 10 years because it has large untapped reserves. Canadian oil sands are probably a net loss when it comes to energy production, not to mention the disgusting amount of oil used. We are now going far offshore with out oil drilling which is logistically and economically much harder than shallow water.

All this and we don't even have billions of Chinese and Indians driving yet. Give them 20 years. This also doesn't factor in the damage to the Saudi fields from over pumping, etc.

Oil will never be completely gone, but prices are not coming down any time soon.

Malthus was a pessimistic political conservative whose theory raises a valid concern but hasn't panned out. The Arab spring weren't bread riots. Population control for poor people? This will lead to growth? Seriously, read some different authors and broaden your perspective, your thinking is ever complicating permutations of the same narrow view.

The difference between a malthusian and a cornucopian is how sober you are in your analysis of technology's ability to keep up with population growth. I just don't see the catalysts that are going to be there to feed, clothe, house, transport and warm 10 billion people so they can enjoy a middle-class American lifestyle. But we do have the resources here in the US to do that for 300 million people.

Population control won't lead to growth, but it will lead to affluence.

Affluence= Technology * Environment/Population. Want to increase affluence? Increase technology or increase resources per capita.