Income Inequality: A Rising Tide Lifts All Yachts

In Vanity Fair, Joe Stiglitz writes an excellent jeremiad on growing income inequality in the U.S.  Most of what he said is factually correct, although claims about the average American being worse off (his claims, but more noisily those of various leftie groups) are simply wrong because of upward biases in inflation measures.

Photo: iStockphoto

But so what? Comparisons matter, and it’s not just an issue of envy. Even though the average American is better off in real dollar terms than 20 years ago (despite our American national pastime of “bitching”), the concentration of economic power is growing most among a very few fragments of society. And, with the Supreme Court having handed the rich carte blanche to subsidize political candidates, the institutional framework for the economy can be changed in ways that disproportionately help the rich. Even though a rising tide may lift all boats, if giant yachts are lifted higher, the political backwash can make us paddlers of rowboats worse off!

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  1. Eric M. Jones says:

    I keep begging Dube to publish this graph which shows the distribution of US Wealth. Anyone who understands what the graph shows will be mortified. I don’t really see a way out of it. Buy, hey, there are smarter people…like those who got us into this mess.

    Please see:

    Note that this is a single page Adobe PDF file. I won’t hurt your computer.

    Arthur Kennickell is publishing an update for 2010, to show how the “Big Recession” affected Americans. Be prepared for even worse news than this graph.

    The basic truth is that the top 2% of the population owns 50% of all US wealth. And 50% (half the population) has 2% of the wealth…or essentially stone poor.

    Welcome to America.

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    • JP says:

      The way out is to continue somewhat down the path we were on. Although scary, I can assure you that the a wealth distribution grap like that would look even scarier if you look at countries that don’t employ some form of capitalism or before capitalism. Currently, I would fit in the bottom 50%. By the end of next year my wife and I will have moved into the next 4o%. That will allow us to move higher.
      I do think we should tax the top top tier a little more, but we need to have a clear purpose and justification other wise it’s a slippery slope to all out class warfare.

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  2. Andy says:

    You left out that union groups can now give carte blanche to democrats as well. Something President Obama doesn’t mention when he talks about that ruling. Very interesting…

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    • Quinton says:

      That is because it isn’t particularly relevant. Unions represent approximately 1 in ten in the workforce, and they are heavily concentrated in a few industries. They are no longer the political counter weight to corporations that they were in the past. Unions have been on a steady decline whereas the political power of the most wealthy corporations and individuals has been rising consistently for thirty years. That isn’t to say that the decision is solely to the benefit of one party. Democrats have a number of wealthy members as well who I’m sure will do their best to effect the political process. Unions, however, are at best diminished and at this point more of a conservative bugaboo than an effective political force

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      • Andy says:

        Hidden due to low comment rating. Click here to see.

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      • Quinton says:

        I’m sure he would, as his salary and livelihood depend on the opposite being true. That doesn’t make him any more right. Scott Walker, though, may disagree and we’ll find out in the next election if Unions have any more political power.

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      • Jp says:

        Although not once what the were, unions are still extremely powerful.

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  3. J Webb says:

    You do understand that the Court ruling applied to unions as well.

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  4. Colin says:

    Rich people — you mean like all of those self-funded candidates in the last election like McMahon and Whitman who spent gobs of money to little avail? In WI, where about the only self-funded candidate actually won, Feingold conceded after the race that even if he had another $10 million he still would have lost and money wasn’t the decisive factor. This notion that $$$=electoral success is more theory than fact.

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    • pawnman says:

      A theory which, correct me if I’m wrong, was debunked to some extent in the first Freakonomics book.

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  5. Gordon says:

    Did a tenured professor at a large state university just refer to himself as a “rowboat paddler”?

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  6. pablo says:

    It’s sort of obvious to analyze the economy as a game – the wealthy have some influence over the rules of the game, succeeding in the game increases their wealth, and accumulated wealth is never redistributed thanks to immortal corporations, low/ineffective estate taxes, etc.

    The outcome of any game thus organized should be immediately obvious, and the choices for fixing it include preventing inheritance of significant wealth and/or eliminating the connection between wealth and political power.

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  7. RogerP says:

    Colin wrote:

    “Feingold conceded after the race that even if he had another $10 million he still would have lost and money wasn’t the decisive factor”

    Of course, if he’d read Freakonomics he would have known that before spending anything.

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  8. Gary says:

    You ultimately can’t repeal the Constructal Law.

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  9. RogerP says:

    Regarding Eric M Jones’ contribution, surely such unequal distribution of wealth would be reported as a high Gini Coefficient?

    We are continually being told that South Africa has the highest Gini Coefficient in the world, but Eric’s link seems to knock that into a cocked hat.

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  10. James says:

    The point that’s always missed in these sorts of discussions is that it’s not primarily a matter of the rich getting richer. If you look at e.g. the Forbes 400 list of richest Americans, you’ll see that the majority of the wealth represented there – the Microsofts, Amazons, Facebooks, and even WalMarts – is wealth that didn’t exist a generation ago. (And for every Bill Gates, there are hundreds or perhaps thousands of “Microsoft millionaires”.) Most of the rest – the hedge funds and such – is likewise new wealth that was snatched out of the stream by people who didn’t create it.

    For the rest of the population: if you do just what your parents did (work that assembly-line or office job), and spend all your income on lifestyle, why should you expect to be richer than your parents?

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    • pablo says:

      “For the rest of the population: if you do just what your parents did (work that assembly-line or office job), and spend all your income on lifestyle, why should you expect to be richer than your parents?”

      Perhaps your question should be: if you just do nothing, but your parents were rich, why should you expect to be richer than the billions of people who work?

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      • pawnman says:

        But his point is that most of the folks on the Forbes 400 didn’t get there through inherited wealth. Further, if I work to establish a successful company as Gates or Buffett did, why SHOULDN’T I have the ability to give my kids a better start in life than I had?

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      • Ryan says:

        Not a lot of people are begrudging the Bill Gates, Steve Jobs or even Mark Zuckerbergs of the world because of their money. (There’s plenty else to begrudge those 3 about! privacy, openness, patent trolling, etc.) I don’t even

        Most people are begrudging two categories of billionaires mostly, the bankers that blew up the world and got to keep all the profits, and oil industry execs who make a killing on pumping and selling a limited resource to us for ridiculous margins, a resource we all technically should all collectively own a greater share of as they didn’t invest in dinosaurs 65 million years ago to my knowledge.

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    • Ryan says:

      “For the rest of the population: if you do just what your parents did (work that assembly-line or office job), and spend all your income on lifestyle, why should you expect to be richer than your parents?”
      If the Boss, and the Board, and the Financiers are making buckloads more money, why shouldn’t they expect to have to pay workers more? The rich absolutely control this current economy, they own so much of it that that it really only can be them. With that control over the economy, they can create recessions in order to create unemployment so that they can buy labor at cheaper prices than they would otherwise have to pay.

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      • James says:

        “…why shouldn’t they expect to have to pay workers more?”

        A little thing called supply and demand? If all you can do is work a low-skilled job, so you can quite easily be replaced by a random body off the street (or a machine), what leverage have you to insist on getting paid more for your work, especially when there are lots of bodies willing to take that job for what you’re getting now?

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      • pablo says:

        I’m confused, are you trying to provide moral justification (if so, you are failing spectacularly) for the plight of the poor, or do you think none of us understand that low-skill workers usually have little leverage?

        I think it’s important not to conflate economics with morality – there’s nothing inherently morally superior about those with higher-demand/lower-supply skills versus those with lower-demand/higher-supply skills. I guess words like “should” blur these lines, and thus make it harder to respond to you.

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      • James says:

        How did morality get in here? There’s no moral justification (or lack of one) either way, any more than one can ascribe moral justifications to gravity when people are hit by falling objects.

        I’m also rather puzzled by the supposed plight of the poor. For one, I was under the impression that the discussion was about the middle class, not the poor. For another, I’ve a good bit of experience at being poor, and don’t recall any “plight”.

        You’re right about not conflating economics with morality, but you need to realize that it works in both directions. The rich aren’t morally superior to the poor, but neither are they morally inferior. They’re just people.

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      • Ryan says:

        The rich, who control the economy, are artificially lowering the demand. There’s no lack of work that needs to be done in this country, much of it vital like infrastructure improvements. There’s just a lack of jobs because the rich would rather have a scarcity of demand for labor and a surplus supply, allowing them to reap a larger share of the profits by paying those who are employed less, which then gives them even MORE control of the economy. This is a situation rapidly spiraling out of control.

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      • chandler says:

        i’m sorry james, but if you don’t remember being poor as a plight, i’m willing to bet you weren’t really poor. that’s just silly.

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  11. John B says:

    It should be noted that the greatest increase in the gap between rich and poor happened under the Obama administration with Democrats controlling both houses of Congress.

    But it’s not their fault because we know they “care” about the poor.

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  12. Seth says:

    Concentration of economic power through mutually beneficial transactions is irrelevant. Concentration of political power should be the concern, as well as concentration of economic power as a result of the concentration of political power.

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  13. mikeh says:

    *upward* biases in inflation measures? I’ve been under the impression that inflation measures are greatly downwardly biased?


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  14. Shane says:

    Stiglitz argues that countries with high income inequality – like the US – are less willing to spend money on public infrastructure or education. Let’s not take his word for it.

    OECD’s International Transport Forum shows that highly unequal Russia spends far more on transport infrastructure than the US. Meanwhile spending in relatively more equal Japan has rapidly declined in recent years.

    Likewise OECD figures for public expenditure on educational insitutions shows that highly unequal Mexico spends more as a percentage of GDP than equal Slovakia, while unequal USA spends more than Germany or Japan.

    If the Freakonomics team don’t mind, I’ve blogged about this here:

    Stiglitz’s predictions seem to break down on examination. Unequal countries don’t appear to spend less on public infrastructure or education than more equal countries.

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  15. Eric M. Jones says:

    John B says: It should be noted that the greatest increase in the gap between rich and poor happened under the Obama administration with Democrats controlling both houses of Congress. But it’s not their fault because we know they “care” about the poor.

    Eric says: And your data is what???

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  16. george says:

    the wall street fat cats are doing everything possible to keep wealth out of the reach of average Americans.

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  17. Tony Zuckerberg says:

    the game is rugged and average Americans are just too stupid to figure it out.
    IT also laughable that average Americans think they can became millionair by open up sandwich shop or other small businesses, wishful thinking at the best.

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