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!


Eric M. Jones

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: http://www.periheliondesign.com/downloads/Wealth%20Distribution%202007%20update.pdf

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.

JP

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.

Andy

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...

Quinton

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

Andy

I think Richard Trumka would disagree with you.

Quinton

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.

J Webb

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

Colin

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.

pawnman

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

Gordon

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

pablo

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.

RogerP

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.

Gary

You ultimately can't repeal the Constructal Law.

http://www.constructal.org/

RogerP

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.

James

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?

pablo

"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?

pawnman

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?

Ryan

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.

John B

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.

Seth

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.

Ryan

When did this blog get overrun by partisan hack talking points on both sides?

Ryan

Woops, reply comment was meant to be to the parent article, and not this particular post.

Seth

Thanks for the clarification.

mikeh

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

Mike

Ryan

I believe he means the upward bias of lifestyle inflation, which would be correct.

Shane

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.
http://www.internationaltransportforum.org/statistics/GlobalTrends/Investment.pdf

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:
http://shaneleavy.blogspot.com/2011/04/doubts-about-equality-part-ii.html

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.

Read more...

Eric M. Jones

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???

george

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

Tony Zuckerberg

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.