Tuesday, June 28, 2011

Back To The Gilded Age: Inequality in the United States. The Evidence.

Remember the fairy tale I wrote about income inequality? Here's the big revelation:

It is not a fairy tale. It is what is happening right now, here in the United States, and this post is about the evidence.

Now, "evidence" is one of those words which puts people to sleep. That's because we are programmed to do just that. So let's see if we can look at the evidence from some more interesting angles.

Wealth Inequality

Let's begin by looking at wealth. The pie chart for the distribution of wealth in the US in 2007 is shown below. For the time being, forget about it showing wealth. Assume that it is a picture of a giant strawberry-chocolate cake (from above) which is the dessert for a one hundred person block party.

How should we divide that cake between the hundred eaters?

The chart shows us that the wealth cake in the United States is divided in a way which translates to the following slices at our block party:

One guest gets a bit more than one third of the cake, another nine get four tenths between them, and yet another forty guests get to share a quarter of the cake. The rest, fifty guests, are essentially given but crumbs.

What's so bad about this? Perhaps the one person who got a third deserves that third. Perhaps she or he has worked that much harder than any one of those fifty who are now licking the crumbs off the plate? But how likely is that, really? What is the incentive system which would require HALF of all the guests to be given only crumbs? Are half of all Americans so lazy and shiftless? Could it truly be the case that some can work so many times harder than others that they deserve to almost monopolize the cake?

You figure that out. But maybe next year a different person will be the one who gets one third of the cake? Maybe this year's greedy hog will be among the crumb-getters of the future? In other words, what if we had good social mobility so that the winners and losers would change fairly easily? If nothing else, that would give hope to those surviving on crumbs.

Sadly, social mobility in the United States is harder than in most European countries.

Remember the term "ownership economy?" It's a Republican term which tried to make us think that we are all now capitalists, owners of wealth. But we are not, as the next pie chart shows us:

This particular cake is even more unequally divided than the general wealth cake: One person (one percent) gets more than half of it!

An income cake would show similar cutting patterns. They are less extreme in their inequality, because non-labor income accrues mostly to the rich.

Taxes and Transfers

All that talks about wealth in general and its unequal distribution. But we know that the rich pay more taxes, that the government transfers some money to the poor, that there are (or used to be) support systems such as Social Security, Medicaid and Food Stamps. The value of those should be taken into account before we compare final measures of inequality.

This graph compares the taxes and transfers in a bunch of countries. The horizontal axis measures reductions in income inequality that are achieved through these means. Note where the United States stands.

Mmm. And here's what has happened to the taxes over the last fifty years:

Which partly explains why:

Inequality Is Rising

Like this for income in general:

Or like this for the distribution of wealth:

Or to sum it roughly as my source did, the rich are getting richer and everyone else is getting poorer or running much faster just to stay put.

But don't we all read about the need to attract more firms to the United States? To cut corporate income taxes, to reduce regulation, to lower labor costs? Isn't all this inequality just a necessary part of the new global economy?

The Global Competitive Imperative

This is total hogwash. First, the actual taxes paid by firms in the US are among the lowest in the OECD countries, whatever the initial tax percentage might be, because of all those clever deductions which are allowed. Second, the regulation here is certainly no tighter than in those European countries which somehow manage to have much less wealth and income inequality.

Third, and finally, the US system gives workers far fewer legal benefits than those regarded as obvious in other countries. Take the example of paid maternity leave. Here is a map showing where the United States stands with respect to such a horrible labor-cost-increasing requirement:

Or the case of paid annual vacation days:

How terribly unfair to force American firms to compete against foreign firms which actually have to pay their workers for vacation time and parental leaves! So unfair.

What About The Rising Tide

Does a rising tide lift all boats? That's the saying which means that if we could just increase the societal strawberry-chocolate cake enough, then even a very thin slice would be plenty. But it doesn't quite work that way if the top on percent keeps hogging a bigger and bigger slice whenever the cake grows (if it grows). And remember that we are not just the eaters of that cake but also its bakers. Those who own the bakery see their profits rising while those of us who work near the hot ovens see their incomes either fall in real terms or stay stagnant.

Or put into yet different metaphoric terms: The rising tide floats the yachts real well but the waves this causes drown all the smaller sea vessels.