New Inequality Data

The NY Times reported Friday:

The increase in incomes of the top 1 percent of Americans from 2003 to 2005 exceeded the total income of the poorest 20 percent of Americans, data in a new report by the Congressional Budget Office shows.

The poorest fifth of households had total income of $383.4 billion in 2005, while just the increase in income for the top 1 percent came to $524.8 billion, a figure 37 percent higher.

The total income of the top 1.1 million households was $1.8 trillion, or 18.1 percent of the total income of all Americans, up from 14.3 percent of all income in 2003. The total 2005 income of the three million individual Americans at the top was roughly equal to that of the bottom 166 million Americans, analysis of the report showed.

The data come from the latest update of the CBO's Historical Effective Tax Rates report, which combines the effects of all the federal taxes - income taxes, payroll (social security) taxes, corporate and excise taxes, to show how the tax burden is distributed across households of varying income levels. As part of figuring this, they put together data on income inequality. From the data in the supplemental tables, here is a picture of how the distribution of income has evolved since 1979 (when the data begins), by quintile (i.e. each slice is the share of income going to 20% of the population, with the poorest 20% on the bottom and highest-earning 20% on top):The share going to the top 20% has risen from 42.4% in 1979 to 51.6% in 2005, while all the others have decreased. I've used the after-tax data, so this is income after accounting for whatever redistribution occurs through taxes and transfers (in the pre-tax data, the distribution is even more unequal).

As the lede from the Times story suggests, much of the action is at the very top, as the highest earners are pulling away from what we might call the "upper middle class" (or UMC). In 1979, average income in the top 20% was 5 times that of the middle, and incomes in the top 1% were 10 times those in the middle. By 2005, these multiples increased to 9 and 27, respectively:

Presumably the greater volatility for the top 1% is because they receive a higher share of income from financial assets (the dip in 2001-02 coincides with a bear market; the Times story's focus on 2003-05 makes the change in distribution seem more sudden than it really is).

CBO Director Peter Orzag discussed the report (and methodology behind it) on his new blog. A further breakdown (and more charts) can be found in this brief analysis by the Center on Budget and Policy Priorities.

This issue came up in Greg Mankiw's interesting post on how economists of the "left" and "right" differ - his last point was:

There is one last issue that divides the right and the left—perhaps the most important one. That concerns the issue of income distribution. Is the market-based distribution of income fair or unfair, and if unfair, what should the government do about it?

Mark Thoma spoke for the "left" (or, probably really the "mainstream" since Democrats outnumber Republicans among economists by 2.9-to-1) in his response:

Fair or unfair depends upon how well markets are functioning. If you do not believe that markets are competitive, or that opportunity is equal, then the intervention and redistribution may be correcting the outcome toward what a perfectly competitive, equal opportunity system would produce rather than away from it. It's not that we don't believe that competitive markets are fair, though I can only speak for myself, it's that we don't believe markets that deviate from perfect competition in important ways, i.e. have important market failures, produce outcomes that have defensible equity properties.

There are good reasons for those on the right, who may have trouble seeing either injustice or market failure, to be concerned as well. This is because of two tensions -

1. The contradiction between Christian gospel teaching and extreme wealth, (see, e.g., Matthew 19:24). Growing inequality may lead the part of the "right" that is "Christian" to reconsider whether their politics is truly consistent with their religious views.
2. The tension between political equality and economic inequality. Extreme inequality could ultimately undermine political support for the "free market" economic system and generate more support for "populist" economic policies.

Throughout most of its history, the US has generally shown an exceptional ability to live with the contradiction between economic inequality and the political and moral equality of our political and (majority) religious creeds. As economic inequality continues to increase, thoughtful people of the right may want to consider whether this ability is limitless.