On income inequality

I'm thinking that maybe the income at the top didn't increase extraordinarily fast in recent decades.

Now you're mad at me. But maybe you could reserve judgement till you're more than one sentence in to what I have to say? I always try to "think" about graphs and data. I don't like to see a graph, say That's outrageous, and later find out that what's outrageous really is that the graph is wrong or that I misinterpreted it in some way. So bear with me; I'm just thinking. And I did say "maybe" in that opening sentence.

I'm thinking maybe the income at the top only continued to grow at the same rate as in earlier decades... and that the slowing of income growth for the rest of us makes it look as if the top earners had extra-fast growth.

That's obvious? Okay, but then you can't be mad about my opening sentence.


In A Guide to Statistics on Historical Trends in Income Inequality at CBPP, they say this:

The broad facts of income inequality over the past seven decades are easily summarized:

• The years from the end of World War II into the 1970s were ones of substantial economic growth and broadly shared prosperity.
  • Incomes grew rapidly and at roughly the same rate up and down the income ladder, roughly doubling in inflation-adjusted terms between the late 1940s and early 1970s.
  • The gap between those high up the income ladder and those on the middle and lower rungs — while substantial — did not change much during this period.
• Beginning in the 1970s, economic growth slowed and the income gap widened.
  • Income growth for households in the middle and lower parts of the distribution slowed sharply, while incomes at the top continued to grow strongly.
  • The concentration of income at the very top of the distribution rose to levels last seen nearly a century ago, during the “Roaring Twenties.”

There it is. Right there. Here's what they say:

1. Before the slowdown of the 1970s, incomes grew "at roughly the same rate" for everyone.
2. Since the slowdown, "Income growth for households in the middle and lower parts of the distribution slowed sharply, while incomes at the top continued to grow strongly."

They don't say income growth at the top increased. They say income growth continued at the top, and slowed for the rest of us.

That supports my opening thought.

So does their graph. Here, I added a dashed red line to their graph, to suggest a linear trend for income at the top. My dashed line is a pretty good fit to their top income data. Straight-line trend, no acceleration of income growth at the 95th percentile. For the rest of us, income growth slowed:

Graph Source: A Guide to Statistics on Historical Trends in Income Inequality at CBPP
Art added the dashed red trend line (by eye)

But who the hell is CBPP? So I looked up what the Economic Policy institute -- EPI -- has to say. This is from their America’s slow-motion wage crisis: Four decades of slow and unequal growth, from September 2018:

From the end of World War II through the late 1970s, the U.S. economy generated rapid wage growth that was widely shared. Since 1979, however, average wage growth has decelerated sharply, with the biggest declines in wage growth at the bottom and the middle.

EPI makes the same income comparison as CBPP and says the slowdown begins in the same decade, the 1970s, though EPI and CBPP pick different slowdown-start dates in the 1970s.

EPI also says "the biggest declines in wage growth [have occurred] at the bottom and the middle", suggesting that even at the top, wage growth declined. They don't make this explicit. But if the biggest declines were at the bottom and middle of the income scale, then there must have been a smallest decline and it must have occurred at the top.

Decline at the top. Not a big decline, but decline. The growth of income at the top did not accelerate. According to EPI, it declined.

Income growth lost ground even at the top of the income scale, or at least it did not gain ground. That doesn't make things better for those of us below the top of the income scale. But it seems to be an accurate description of what happened. And if we want to fix the economy, we need to know what did happen and what didn't. You can't fix what went wrong if you don't know what went wrong.

If my opening thought is true, as it now appears to be, then the solution is to boost economic growth enough to restore the growth of income for the lower 99%, rather than reducing the growth of income at the top.

We need growth, to boost income for the rest of us. Maybe we need some constraints on income at the top, too; it would seem so. But reducing income at the top is not the solution. Increasing income where income is low, this is the solution. Increasing income is the solution.

And that means economic growth is the solution.


From an old post:

Of course it would be better if we reduce inequality. Better for some of us, at least. But you have to remember that the people who are doing well want their fair share just like the rest of us. And the blue line [20-year Trend Growth of RGDP per Capita] has been going downhill. So when they get theirs, things are normal for them and bad for the rest of us...

Eliminating inequality cannot work as long as the blue line is going down, because when the blue line is going down, eliminating inequality makes everybody poor. The highest priority is not to eliminate inequality, but to improve economic growth.

- Arthurian, in Economic Growth and Inequality