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February 27, 2006

Income Inequality Bonanza

In the New York Times, columnist Paul Krugman deflates the notion that widening income gaps are the result of education and specialized skills:

...a college degree has hardly been a ticket to big income gains. The 2006 Economic Report of the President tells us that the real earnings of college graduates actually fell more than 5 percent between 2000 and 2004. Over the longer stretch from 1975 to 2004 the average earnings of college graduates rose, but by less than 1 percent per year.

The Economic Policy Institute makes the same point on their website: "Since 2000, the real earnings of college-educated workers (those with bachelor's degrees) have fallen quite steeply..." So having a degree doesn't guarantee that you'll grab a big slice of income pie. But who is capturing all the wealth?

As Krugman points out, big income gains have lately been restricted to a very tiny slice of Americans:

Between 1972 and 2001 the wage and salary income of Americans at the 90th percentile of the income distribution rose only 34 percent, or about 1 percent per year. So being in the top 10 percent of the income distribution, like being a college graduate, wasn't a ticket to big income gains. But income at the 99th percentile rose 87 percent; income at the 99.9th percentile rose 181 percent; and income at the 99.99th percentile rose 497 percent. [Emphasis added.]

In other words, not only are the ultra-rich getting richer, but they're getting richer much, much faster than the plain old rich. And even if you count yourself among the fortunate few who earn more than 90 percent of American households, your gains (as a class) have been very slow.

And the picture looks even bleaker for young workers.

Against that backdrop, the Christian Science Monitor reports that incomes for younger Americans are actually falling. Among the findings:

  • Income fell 8 percent, adjusted for inflation, for those under 35 and 9 percent for those aged 35 to 44.
  • The median income for men under age 44 was significantly lower in 1997 than in 1970, after adjusting for inflation, according to a long-term analysis by the Census Bureau in the late 1990s. For those over 45, incomes barely held their own during that period.
  • The entry of women into the workforce in those decades has helped push median family incomes up over time. But even when men and women are included together, younger workers (age 25-34) are earning well below what they did in 1970. And at all ages, evidence suggests that families are putting in more hours of work to make their household incomes rise.

Add to these financial stresses the skyrocketing cost of healthcare, education, and housing (no, it's not really cheaper today) and you have a recipe for a rather unhealthy looking economy. What's most astonishing to me, however, is how little play these stories get in the media.

Business page-dominating stats like GDP and the Dow simply don't tell us very much about the economy--or at least about how the economy actually affects people. It will be interesting to see which gets more media attention: the increasingly fragile income dynamics for ordinary Americans or the 2005 GDP numbers that the feds are just about to release. I'll go out on a limb and guess it's gonna be GDP.

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"What's most astonishing to me, however, is simply how little play these stories get in the media. "

The corporate-dominated and -controlled media, 90-some % owned by a handful of companies?

Folks read blogs and such to get this kind of information precisely because it's not going to get play in the em-ess-em. The pushback on blogs by the em-ess-em is indication that it's making a difference.

Posted by: Dan Staley | Feb 27, 2006 3:43:34 PM

Add to these financial stresses the skyrocketing cost of healthcare, education, and housing (no, it's not really cheaper today) and you have a recipe for a rather unhealthy looking economy.

You picked out the perfect three problems that illustrate what is wrong with a lot of conventional economic thinking. Many dismiss income inequality as a concern, reasoning that if wages on the bottom have risen relative to inflation, then their lives have improved as well and we should disregard their jealousy that the lives of those on top has improved even more. After all, they can afford things people of similar class in other countries or in previous times could only dream of.

This reasoning applies to goods that can be produced and that over time the rate at which they are produced (relative to the number of people producing them) will increase over time. Things like food, TVs, other standard appliances, plumbing, etc, have gotten more affordable because their costs rise at rates lower than those at which incomes rise, roughly at the rate of inflation. For various reasons housing, education, and health care do not follow the same laws. They can be expected to grow at the rate that income grows, some times faster or slower depending on other factors, but in general we can not expect progress or economic growth to make them more affordable.

Housing costs are largely driven by land costs, and of course land isn't easily produced. Thus the price you pay for land is essentially the price of making it too costly for everyone else who would buy that land if it weren't for the price. Thus land prices rise with income if population is held constant and faster if population is rising. The land costs of housing are reduced by building more densely, but this can break down if a few wealthier individuals will pay more for a property that a larger number of lower income individuals. I believe you recently pointed to a housing study that found income is the number one predictor of housing costs in an area.

Education and Health Care are both services, so a large part of the costs is always going to be paying the wages of those providing the services. There aren't a lot of ways to provide more health care with fewer doctors or more education with fewer teachers. But as the economy improves and wages rise, the wages of doctors and college professors also rise -- after all, to get competent people in these fields which require skill and education, you need salaries that compete with all the other fields they could be getting into instead, and those wages are rising faster than inflation.

The point of all this is that the three problems you cite are not a result of insufficient but rather are direct results of income inequality. Rising income inequality means that the wages of those at the bottom have gotten smaller relative to the wages of a doctor or college professor, which means it is more difficult for them to afford health care or a college education. Likewise, the inaffordability of housing won't be solved by rising incomes -- it is caused by rising income inequality. This is why income inequality needs to be taken more seriously as a problem in and of itself. We also need to realize that to solve the problems of health care, housing, and education, we need to either have the government guarantee them or take action to reduce income inequality.

Posted by: Eric L | Feb 27, 2006 6:27:41 PM

The Fed's Survey of Consumer Finances shows real median income rising by 20-21% from 1989 to 2001 for the top 10% but also for the bottom 40%.

Median income gains for men have lagged those of women, but it's about time we let some gals into the club (e.g., as lawyers, physicians, college profs).

Real wages & salaries always do poorly when oil prices spike, but it has been better this time than before (oil price spikes always caused recession before).

Mr. Krugman's second-hand misuse of income-tax figures to estimate share of income goes to the top 1 percent is fraudulent. And such sources are carefully selected to mislead. See one of my columns for just one example:


Alan Reynolds

Posted by: Alan Reynolds | Mar 12, 2006 8:47:16 AM

Alan, your rhetoric looks familiarly formulaic - almost boilerplate - in that column.

I also notice, Alan, the chart on pg A4 (chart 1, 2004 SCF) here:


disagrees with your assertion.

Chart 5, however, is where we should look. We see income increases of ~20% for the categories you focus on, but the point is for the top 1% or so. Looking on pg A8 for distribution of family net worth is instructive as well, Alan. A11, with investment types, tells us a lot too.

In fact, thanks for pointing out that survey, Alan. When we actually read it, it reinforces what Krugman was saying.

I'll stick to reading opinions of short-listed Nobel nominees - I usually don't need to check their statements.


Posted by: Dan Staley | Mar 12, 2006 4:50:00 PM

Here is an optic in the change in inequality for the US from 1970-1990:


Explanation here:


Posted by: Dan Staley | Mar 12, 2006 5:36:10 PM