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Income and Wealth Distribution in the U.S.
Phil Martinez

INCOME and WEALTH

One of the recent, major trends in the U.S. economy is the growing gap between the poorest and richest sectors of the U.S. population. Depending upon the measure being used, virtually all studies confirm that since the early 1970s both income and wealth inequality have been increasing in the U.S.

Income is the flow of earnings paid for the employment of a resource. For example, wages and salaries are paid for the employment of labor; interest and dividends are paid for the employment of financial capital; rent is paid for the employment of real estate. Income, as a flow of earnings from the employment of a resource, is "turned-off" like the flow of water from a faucet, when the resource is no longer employed.

By contrast, wealth is a stock of owned assets. Wealth does not "flow" as income does from the employer of a resource to the resource holder. Rather, wealth "accumulates" to the owner of the stock of assets as the value of the assets appreciate. Furthermore, the assets do not need to be productive. They maybe speculative since an asset can be anything that can be sold or liquidated in the market.

The most common sources of household wealth are houses, cars, appliances and electronic equipment, and jewelry. Other forms of household wealth include art collections, precious metals, heirlooms and antiques, and luxury items, like boats and yachts.

The most valuable sources of wealth are business assets such as business ownership, stocks and bonds, trademarks and patents, factories and machinery, commercial real estate, and natural resources (e.g. mines, forestland, and water rights).

Note that assets and wealth can also generate a flow of income separate from the market value (or price) of the asset itself. For example, a share of Apple, Inc. stock has a price or value, say $89, and pays a dividend, maybe $0.05 per share.

Note also that a person can have high income and little or no wealth, such as a professional, say a doctor or lawyer, putting her children through college, and carrying a net debt. She may earn $120,000 but spend $130,000.

Similarly, a person can have low income and still have wealth, such as a person earning minimum wage who has inherited $100,000 in stocks and chooses to keep the stock for retirement rather than cashing it out.

WHY INCREASING INCOME INEQUALITY MATTERS

Income inequality by itself is not a much of a problem. No one expects every individual, family, or firm to earn exactly the same income. Additionally, some income inequality tends to motivate people to work harder in order to earn more. However, income inequality does become a problem when it consistently grows for an extended period of time causing the gap to become so large that threatens the basis of our society and economy. This is the concern today.

Income inequality is problem for America for two basic reasons. The first problem is the loss of opportunity. Those people and families with lower incomes have fewer opportunities in the economy compared to those who have higher incomes. A market economy, or capitalism, promises more opportunity for the population than any other economic system we have known. But , if there is growing gap between the rich and everyone else, then the economy begins to concentrate opportunity and benefits on those at the top and to restrict opportunities that people in the middle and bottom have had in the past. This undermines the promise of capitalism as well as the society's cohesion.

The second problem is that increasing inequality results in increasing social problems for the society as a whole. The more unequal societies have higher rates of violence, mental illness, drug abuse, physical illness, and teen pregnancy. Indeed, virtually all social problems increase as inequality increases. Richard G. Wilkinson is Professor of Epidemiology University College London and a leading researcher in field of the impact of income inequality on health and social outcomes. See his TED Talk here: Richard Wilkinson, How economic inequality harms societies, Oct. 24, 2011.



INCOME INEQUALITY versus WEALTH INEQUALTIY

Of these two notions, wealth is by far more important since wealth generates the ability to earn more income and generate additional wealth. As it accumulates (grows) it will eventually generate economic and even political power. Because the market rewards people based upon the value of the assets they own, the more wealth one accumulates, the less likely it is that one will fail in the market economy. The less wealth one owns, the more difficult it is to be successful in the market economy.

When the gap grows between those with higher incomes and those with lower incomes there is a growing gap between the rich and the poor. However, there still remains some degree of mobility between income earners. Some income earners at the low end will have their income rise over time and some at the high end will have their incomes fall over time.

However, when the gap in wealth grows, those who own more wealth gain greater economic (and eventually political) power, while those with less wealth lose economic influence and with it political relevance. Thus, wealth inequality concentrates the power to change the rules of the economy and the power to change legislation and the political process in the hands of very few people. Put simply, an overconcentration of wealth undermines democracy itself. Thus, an increasing wealth gap is potentially far more damaging to a nation's economy, democratic values, and stability than an increasing income gap. Of course, over a long period of time an increasing income gap is likely to cause an increasing wealth gap.


EVIDENCE OF INCREASING INCOME INEQUALITY: MEDIA REPORTS

The increasing gaps in income and wealth in the U.S. over the last 35 years is well documented. The income gap increase is regularly reported in the U.S. media (although it is often misidentified as a wealth gap). There is also a wide range of economic studies and reports identifying both the income and wealth gaps, although most of the reports regarding the increase in the wealth gap are academic studies that are not often reported n the U.S. media.

Here is a quick review of headlines and introductory paragraphs from articles that I have collected over the years.

Tuesday, July 24, 1990
Los Angeles Times
"Rich-Poor Gap Held Widest in 40 Years"
By Stanley Meisler

The incomes of the richest 1% of Americans grew by 87% in the last decade while the incomes of the poorest American households dropped more than 5%, the Center on Budget and Policy Priorities reported Monday.


Thursday, October 17, 1991
Los Angeles Times
"As Number of Poor Grows, No Solutions Seem in Sight"
By Jennifer Toth

The proportion of Americans whose earnings are below the official government poverty line - the income level designated by Congress as minimum needed to sustain a family of specific size -has increased since the 1970s and is growing rapidly.


Sunday, September 3, 1995
The Register Guard
"Profits climb, not wages, study says"
By The Associated Press

Business profits have soared in the 1990s largely because the wages of American workers have been kept stagnant, according to a report released Saturday by a think tank affiliated with labor groups.


March 21, 1996
The Register Guard
"Rift widens between rich, poor"
By The Los Angeles Daily News

The gap between rich and poor has continued to widen during the 1990s, according to a new think tank report…

From 1973 to 1993, the wealthiest 10 percent of Americans saw their real incomes rise by 22 percent compared to a drop of 21% among the poorest 10%, according to a study by RAND Corp. in Santa Monica.


Sunday, Sept 6, 1998
The Register Guard
"Economic recovery passes by workers"
By Harry Esteve, The Register Guard

Working families in Oregon and across the United States made little financial headway during the 1990s, despite one of the longest economic recoveries in history, according to a report released this Labor Day weekend by a Washington, D.C. think tank.

Adjusting for inflation, pay for median wage earners fell 3.1 percent between 1989, the peak of the last economic boom cycle, and 1997, the report said.


Sunday, January 10, 1999
The Register Guard
"Wealth gap keeps getting wider -
For 20 years, the poorest 40 percent of Americans have last ground"
By Scott Shephard, Cox News Service

While all income groups earn more than they did 30 years ago, most of the increase has gone to the top on-fifth of earners, That group has increased its share of national income compared to 1967, while every other group fell


Sunday, March 12, 2006
Parade Magazine
"While the economy grew in 2005, many wage earners say they'e wary about their financial future"
By Lynn Brenner

…The U.S. has enjoyed four straight years of economic growth, but most families have lost ground: In 2005, more than 80% of American workers saw their inflation adjusted wages fall for the second year in a row.

While the economy has been growing since 2001, al the benefits of that growth have gone to corporate profits, says Mark Zandi, chief economist at Moody's Economy.com, Pennsylvania-based consultant firm: "Corporate profits' share of the national income is at a 60 year high and that has come directly out of wages and salaries, which are at a record low." And wages of the top 10% of earners, people making $90,000 a year  - have risen much faster than everyone else's. The average worker's pay stayed almost flat at $27,000 from 1990 to 2004, one study finds.


March 29, 2007
The New York Times
"Income Gap Is Widening, Data Shows"
By David Cay Johnston

Income inequality grew significantly in 2005, with the top 1 percent of Americans, those with incomes that year of more than $348,000, receiving their largest share of national income since 1928, analysis of newly released tax data shows.

The top 10 percent, roughly those earning more than $100,000, also reached a level of income share not seen since before the Depression.

While total reported income in the United States increased almost 9 percent in 2005, the most recent year for which such data is available, average incomes for those in the bottom 90 percent dipped slightly compared with the year before, dropping $172, or 0.6 percent.

March 10, 2008
The Register Guard
"Study: Middle class sees little progress in past five years"

By Hope Yen, The Associated Press
... a majority of all Americans said they havent progressed in the past five years. One in four, or 25 percent, said their economic situation had not improved, while 31 percent said they had fallen backward. Those numbers together are the highest since the survey question was first asked in 1964.

...Middle-class prosperity overall also lagged compared with richer Americans. From 1983 to 2004, the median net worth of upper-income families defined as households with annual incomes above 150 percent of the median grew by 123 percent, while the median net worth of middle-income families rose by just 29 percent.


January 26, 2010
The Register Guard
"Oregon wage gap widens"


... the state's wealthiest are not only earning more, but the rate at which their incomes are growing far outpaces people earning less. Middle class earners continued to have sagnant wagesfor much of the past decade.

...Inflation adjusted annual wages for Oregon'ss top 2 percent of earners ... (was) up 29.5 percent from 1990.

...Workers at the 50 percentile, meanwhile, earned ... an increase of just 2.4 percent over 1990 after adjusting for inflation
.

November 23, 2010
New York Times
"Corporate Profits Were the Highest on Record Last Quarter"
Americna business earned profits at an annual rate of $1.659 trillion in the third quarter, according to a COmmerce Department report released TUesday. That is the highest figure recoded since the government began keep records over 60 years ago, at least in nominal or noninflation- adjusted terms...

...As a share of gross domestic product, corporate profits also have been increasing, and they now represent 11.2 percent of total output.

February 2, 2011
Wall Street Journal
"On Street, Pay Vaults to Record Altitude"
In 2010, total compensation and benefits at publically traded Wall Street banks and securities firms hit a record of $135 billion, according to an analysis by The Wall Street Journal. The total was up 5.7% from $128 billion in combined compensation and benefits by the same companies in 2009.

October 27, 2011
The Register Guard
"The rich get richer"

In its report, the budget office found that from 1979 to 2007, average inflation-adjusted after-tax income grew by 275 percent for the 1 percent of the population with the highest income. For others in the top 20 percent of the population, average real after-tax household income grew by 65 percent.

 

By contrast, the budget office said, for the poorest fifth of the population, average real after-tax household income rose 18 percent.

 

And for the three-fifths of people in the middle of the income scale, the growth in such household income was just under 40 percent.



November 14, 2011

Los Angeles Times
"America fails wealth gap test"

The gap between the wealthiest Americans and the poorest is bigger than at any time since the 1920s just before the Depression. According to an analysis this year by Edward Wolff of New York University, the top 20 percent of wealthy individuals own about 85 percent of the wealth, while the bottom 40 percent own very near 0 percent. Many in that bottom 40 percent not only have no assets, they have negative net wealth.

In our survey, Americans drastically underestimated the current gap between the very rich and the poor. The typical respondent believed that the top 20 percent of Americans owned 60 percent of the wealth, and the bottom 40 percent owned 10 percent.
Americans wanted the top 20 percent to own just over 30 percent of the wealth, and the bottom 40 percent to own about 25 percent. They still wanted the rich to be richer than the poor, but they wanted the disparity to be much less extreme.

January 29, 2012
Los Angeles Times
"Faces of Poverty"
...While productivity has grown by more than 80 percent over the last 30 years, wages effectively have been flat for 80 percent of Americans, So although we're making stuff faster and more efficiently, the benefits of of that hard work have not trickled into the pockets of the people who do it.



Evidence of Increasing Income and Wealth Gaps: Academic Studies

In the past the Income Gap has shrunk overtime in the U.S. economy. On average the  lowest income earners have  slowly gained compared to  middle and high income earners. As reported below in a study by United for a Fair Economy, a labor funded think tank, from the end of WWII until 1979 bottom 95% of all households increased their income more rapidly than the top 5% of income earners, with the poorest families receiving the largest percent increase. While the wealthiest families increased their income by an average of 86% all other families increased their incomes by 100% or more, with the poorest 20% of families increasing their income by 116%. Thus, the income gap between the highest income earners and lowest income earners shrunk over this time period.





By contrast, the report shows that since 1979 the Income has not only grown, but the bottom income earners have actually had their real income fall (when adjusted for inflation). From 1979 to 2003 the highest 5% of all families had their income grow by 75% compared to the poorest 20% of all families who actually had their incomes fall by 2%. Note also that each income level is pulling away from the income earners below them, but are falling behind the those income earners above them. Thus, rather than building a strong middle class we are stretching out and separating all income classes. The wealthiest 1% of all income earners are gaining income at a faster rate than the top 5%, who are gaining income at a faster rate than the top 10% who are gaining income at a faster rate than the top 20%, et cetera.


Income79to09



IMPACT of the GREAT RECESSION on INCOME INEQUALITY

IncomeChg07to09


INCOME and MOBILITY

MobilityQuints




MobilityGens


WEALTH DISPARITY IN THE US


WealthHhd


WealthHome


WealthNetWorth



WealthRatio



Paul Krugman on Income Inequality - San Francisco Commonwealth Club, Oct. 30, 2007

Nick Hanauer, Venture Capitalist, on Income Inequaltiy  - TED Talk, YouTube, May 17, 2012



The Great Divergence (Income Inequality in the United States) - Timothy Noah, Slate, September 3 - 19, 2010.

In September 2010, journalist Timothy Noah, published an excellent summary of current academic studies on the state of inequality in the United States. This is a 10 article series that reviews all of the major controversies and possible causes of increasing inequality. Below is the series' summary of the impact of various likely causes of inequality.

"Here is a back-of-the-envelope calculation, an admittedly crude composite of my discussions with and reading of the various economists and political scientists cited thus far:

Income Distribution (Bottom 98% of U.S. Households 2005), by Visualizing Economics

Inequality.png
 

Congressional Budget Office Report:
Household Income Trends 1979 - 2007