Income Inequality Is At Its Highest Point Since Before The Great Depression

The Great Recession increased income gaps. The top earners’ income dropped by 4%, but the bottom household’s income dropped by 20%.”

(The Great Depression of the 1930s actually reduced the income gap, and the gap continued to close until the late 70s.)

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The rebuttal argument is as follows:

The rich are not really that rich. Their wealth is artificially inflated by stock prices currently at or near the top of an unsustainable “bubble.” Perhaps that is true, but it sounds like the ol’ “I’m not really rich. Don’t tax my yacht” argument.

18 thoughts on “Income Inequality Is At Its Highest Point Since Before The Great Depression

  1. What, exactly, is this ‘Income Inequality’ bull?

    Are you saying that the owner of the company makes more money than the janitor?

    I think that’s how it’s supposed to work, although I had a business where everybody made more money than I did!

    1. It has almost nothing to do with salaries. It measures the percentage of wealth controlled by the top 1%. That peaked in 1929, then steadily fell until the late 70s, first because rich people lost their paper worth, and then because the middle class grew into a powerful economic force in the post-war period.

      The current escalation has two causes: (1) the value of stocks is wildly inflated, thus elevating the top 1%; (2) the relative wealth of the middle class is falling. It’s not a case of “the rich get richer and the poor get poorer,” but rather “the rich get richer and the middle class is struggling.” One direct cause of the transfer of wealth from the middle class to the rich is the cost of health care, which transfers an inordinate amount of money from middle class worker bees to the doctors, insurance companies and pharma companies. Health spending per person in the U.S. was $10,224 in 2017, which was 28% higher than the next highest country, and double the average of the other developed nations. (Twice as much as Canada, to make the most direct comparison.)

      Another source of wild inflation is tuition. Between medical bills and student loans, middle class citizens are unable to accumulate wealth.

      To understand the math, look at it in a hypothetical world with only two families headed by Mr. Bigg and Mr. Average. Each has a kid in college. Mr. Bigg makes $500,000 per year and Mr. Average makes $60,000. The problem is that education and health care cost the same for both, so after subtracting those things, plus food and shelter and payroll taxes, then adjusting for the increase in the value of their home equity, Mr. Average has accumulated $2,000 in wealth and Mr. Bigg $250,000. Bigg has accumulated more than 99% of that year’s wealth in their tiny universe.

      Now – imagine that everything else is the same, but health care and education cost the same as in Canada. Now all of a sudden Bigg has $270,000 and Average has $22,000. Each of them has $20,000 more than before, but Bigg now only controls 92% of the wealth. Big difference. In the previous scenario, Average is left with virtually nothing at retirement, while in the “Canadian cost” scenario, Average might have a nice little nest egg of a million bucks or more in an IRA after his 45 years of hard work.

      Those massive out-of-control fixed costs are preventing the middle class from accumulating wealth and therefore causing the top 1% to claim an ever-larger share of the wealth.

      This is why people like Bernie and AOC argue for a national health plan and free tuition. It’s not a hand-out, but an attempt to build a wall around a besieged middle class.

      Whether they have the right solution – I don’t know.

      But I do know those out-of-control fixed costs have to be controlled before the middle class disappears entirely. (Plus good health and a good education are keys to social mobility. They enable people to leave the middle class entirely and join the one percenters of the future.)

  2. “If I like chocolate it won’t surprise you that I have a few chocolates in my fridge, but if you find out I’ve got 16 warehouses full of chocolate, you’d think I was insane. All these rich guys are insane, obsessive compulsive twits obsessed with money — money is all they think about — they’re all nuts. ” – John Cleese

    It’s a matter of degree. Yes, people are paid at different rates. The CEO contributes more to the company. But 300 times more? 500 times? No. It’s a con.

        1. The only obvious fact, other than the hyper-inflated paperwork showing differences in wealth, is that in big companies the CEOs make more and are worth more than the average employee or customer.

          Maybe I’m just a simple old man, but the only decision I have in how much that CEO makes is whether I shop with his company.

          Do I like the idea that Walmart’s CEO last year made $22 million plus? No. Can I control that in any way? Probably not, but I can refuse to shop at a store that has that type of spread between the workers and the CEO.

          That’s why I don’t shop at Walmart anymore. If a large majority of the middle class would also stop shopping there, I guarantee that the CEO’s compensation would go down drastically.

          It’s just like TV advertising. You don’t like something about a certain TV show? Don’t spend your money with the advertisers on that show. Once the advertisers realize they are not getting the response they want, they will stop advertising and the show will be cancelled.

          Stop trying to control the company that you don’t own and use the power of the dollar. It’s more powerful than any complaint, argument, protest march or picket sign ever made.

          1. I think we may be in violent agreement here. These B-school slugs have made their hyper-inflated salaries the norm.
            Your remedy would be “don’t shop there”. An OK idea. I don’t think they’d lower CEO pay, though. They’d just swap out CEOs & likely pay the new one even more.
            Mine would be a real progressive tax on the 20th, 21st, and 22nd million that guy makes.

          2. Nonsense,

            You can vote for politicians who will overturn the so-called ‘right to work’ laws and who will support other measures to assist private sector unions.

            You can vote for politicians, like those in California, who pass legislation that seriously restricts the use of ‘non compete’ clauses in contracts.

            Leveling the playing field between employees and employers is by far the best tool available to enable employees to get a greater share of the gains from productivity and trade.

      1. Depending on the ‘decision’ you are referring to, because in a democratic system, everybody has a say in that decision.

        As a liberal leaning neo-classical economist I and people like me have a love hate relationship with Uncle Milton Friedman.

        On the positive side, Friedman promoted ‘supply side economics.’ Supply side economics doesn’t really have anything to do with corporate or upper income tax cuts, it’s the answer to the fundamental question in macro economics of what leads to long run economic growth. Keynesians argued it was increasing consumer spending (demand side), Friedman and the Monetarists showed convincingly is was ‘increasing productive capacity.’

        On the down side at his worst, Friedman argued in favor of Social Darwinism: rich people are rich because they deserve to be rich and anything that inhibits their ability to increase their wealth ultimately hurts society in the long run.

        1. Well, most neo-Classicists would now reply to that ‘bollocks.’

          An economy is not a ‘natural thing’ unlike biological forces, even though market forces do exist, an economy operates on the rules set in place.

          If you think not, try to imagine wealth formation in an anarchy. Some argue ‘well the wealthy would just hire private security.’ However, without rules in place, what incentive would the private security officers have to not simply say to the wealthy person they’re working for: “everything you own is now ours.” In an anarchy, wealthy people are pretty much helpless. It’s not a surprise that in the time of Feudalism the effective police force, the Knights, were also the wealthy lords.

          So, this is not an argument of fairness: ‘wealthy people have a responsibility to the system that allows them to be wealthy’ economic arguments based on ‘fairness’ are considered normative (opinion) based arguments and are generally frowned upon, economists prefer ‘positive’ (factual) based arguments.

          The argument here is simply that there is no natural order that backs up Milton Friedman and the Social Darwinist arguments.

          1. So, are there rules set in place that contribute to income inequality that are not ‘natural’?

            Neo-classical economists like those at the Brookings Institute say these are the two major ones:
            1.Rules making it very difficult in practice for private sector unions to exist.

            2.One that hadn’t been thought of until research by Brookings: the use, much greater than people had previously assumed, of non compete clauses in contracts. When I comment that the Republican Party and their wealthy owners are ‘neo-Feudalists’ I mean it literally: non-compete clauses effectively tie an employee to their employer and take away all of their negotiating leverage.

            So, these two things alone establish that rising income inequality is not the effect of ‘natural’ market forces but are the result of arbitrarily chosen rules.

            Many people point out the demand side effects of rising income inequality, but, there are significant supply side effects as well: in the U.S there are now more job vacancies (6.7 million) than there are ‘officially’ unemployed (6.4 million.)

            Not with all the job vacancies but in many cases the problem with filling these vacancies is a ‘skills mismatch.’ Although the number of college students is at a record high, given the high cost of higher education and the lack of confidence that many young people have that the jobs they would get from their education would pay for their student loans, it seems many young people are unwilling to go to college to get the skills to get hired for these unfilled positions.

            This is both a problem of college costs being too high, but also a problem of rising inequality.

        2. “Monetarists showed convincingly is was ‘increasing productive capacity'” is the Chicago-school equivalent of “In theory, communism works”.
          In practice, Reagan tripled the national debt and raised taxes 11 times. In practice, none of the increases in productivity were passed on as increases in the wages of the producers.
          You don’t need to “encourage” people to invest in businesses. They’re going to do it anyway to avoid having to work.

          1. Well, that’s not what I’m referring to. By ‘productive capacity’ I mean things that enable production like ‘property, plant and equipment.’ Increasing productive capacity also means improving education and the infrastructure of a community.

            Of course tripling the national debt by itself did not increase productivity in the early 1980s but computers and the original programs that ran like spreadsheets, word processing and databases did.

            In the short term, these things put a lot of typists and layers of middle management out of work, in the longer term, the increase in productivity enabled new jobs and industries.

            That this wealth did not go to the workers is much more for the reasons that I wrote: the decline in private sector unions and the increasing power of employers to limit wage demands.

  3. In regards to ‘in an anarchy, wealthy people are pretty much helpless’ think of the French Revolution.

  4. Let me say up front that I am probably a bad Republican because I am not rich. Tax cuts will not benefit me personally in any way. But I have always thought focusing on income inequality is a bad idea. What’s important is increasing the quality of life of the poor and middle class. The problem (one of them) with policies championed by people like Bernie Sanders or AOC, as I see it anyway, is that by focusing on reducing the incomes of the rich (via new or more progressive taxes) is that you can reduce the incentives for the rich (and upper middle class) to save and invest. That can lead to slower economic growth and a smaller overall economy (than would exist without those policies). I am not saying that tax cuts are always a good idea, but I think the focus should be on economic growth and a strong vibrant economy rather than making sure the rich don’t get richer faster than the poor and middle class get richer.

    But then again, unlike AOC, I don’t have an economics degree so maybe doubling taxes, grounding all the planes, and getting rid of the cows is a better idea.

    1. Have you even read any of the discussion here? The whole point is that the economy is growing, but that (median) income is rising nowhere near as quickly. Hence: income inequality is increasing.

      This is a few years out of date, but from my favorite economics blog (Mark Thoma) from 1975 to 2009 Real GDP per capita increased almost 90% while real median (household) income increased about 18%. (one fifth)

      The data show that over the 34-year period, real G.D.P. per capita rose by an annual compound rate of 1.9 percent. … [H]owever, median household income in the United States rose by less than 0.5 percent a year.

      It’s also a complete myth that an economy requires wealthy people (or upper middle class) to save and invest in order to grow the economy. I’m not defending an increase in the top marginal tax rate to 70% (after $10 million), but a person doesn’t have to agree with AOC’s specifics to agree that income inequality is a real and increasing issue.

      1. A rising tide doesn’t really raise all boats that much…but breakers really raise some boats a lot.

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