Changes in the Distribution of Income

Lately, the news has been full of the top-1%. The Occupy Wall Street movement and its various spin-off local movements purport to represent the rest of us. The GFC and its aftermath, particularly in the US and Europe, have brought the inequalities in income distribution to the fore. People the world over are suffering and more than a few of them are speaking out.

The shifts in income distribution in the developed world have been especially pronounced in America. The data support the widely held perception that the middle-class is being “hollowed-out”. Technological change, globalisation, immigration, tax reforms, the decline of union membership and several other factors have converged over the last 3 decades to a common effect: the rich getting much richer, the poor poorer and those in the middle going backwards. Perhaps its especially in the US that this has inspired the current debate. There, the middle-class have long been a pillar of their society, their economy and a centrepiece of post-war intergenerational socio-economic upward mobility.

Recently, the White House has come out with some stark and disturbing analysis of the relationship between income inequality and intergeneration upward mobility. None other than the Chairman of the President’s Council of Economic Advisors, Alan Krueger, has weighed into this issue with a definitive speech last week. He correlates the metric of income inequality (the Gini coefficient) with a measure of intergenerational mobility. The relationship between these two numbers is surprisingly good. It means that in today’s very unequal America, one’s parent’s economic situation is a strong predictor of one’s likely future economic situation. More disturbingly, the more recent data suggests that not only is America getting more unequal, but this intergenerational link is getting stronger. Upward mobility in America, it seems, is waning. Krueger styled this phenomenon “The Great Gatsby” curve. Miles Corak explains it well here:

More illuminating was some of the background to this conclusion. It seems the 1% have not done as well as they are today for almost a century. The last time they have had as large a share of the income pie was in the 20s. Since then there’s been almost a U-curve with the bottom of the U in the post-war reconstruction era.

The difference between the US and Australia is strikingly visible for almost the entire Post-War Era. Today, the top 1% in America have almost double the income share as they do down under. The numbers for Sweden, Japan and France are much more similar to the Australian experience than the one in the US. That doesn’t mean that the Swedish, Japanese, French & Australian rich aren’t getting richer at the expense of their compatriot poor; just not to the same degree as the American rich seem to be.

The situation is just as worrying for the top 10%. Although the difference between Australia and the US is only half as much again (rather than double), it’s clear that the richest tenth of Americans have almost half the income:

Top 10 Percent - US v AUS

Even more surprising, during the Clinton presidency, there was a significant revival in the much more equitable distribution of income in the US – something that can’t be said of the Reagan/Bush years or the last decade. Nevertheless, the news is that the hollowing-out of the middle class is not a new thing and it’s been going on for a long time.

A worrying question arises from all this. If greed for the few was followed by depression, war, social transformation and the Cold War last time, what lies ahead? Surely the world in 2012 is so different from the world in the 1920s, they bear no possible comparison. An interesting insight into this come from my new hero Niall Ferguson. His 2010 John Bonython Lecture in Sydney last year examined the popular view of how Empires rise and fall. The basic idea he presented in consummate Ferguson style was that Empires are complex systems that can and do fall very rapidly even as they appear robust and stable. Such was the fate of the British Empire in the 30s and 40s. His prediction is that this is what we’re seeing in the American Empire today. The parallels are deep, impactful and timely. As a financial historian, Ferguson’s data are also about money. The ones he presented in Australia last (southern) summer were macroeconomic – national debt and interest payments specifically. His case is compelling; the debt situation in America (and Europe) is particularly severe.

Has globalisation and the accompanying offshore outsourcing of jobs contributed to this mess? Certainly. Has technological innovation and its relationship with financial capital forever changed work and the distribution of income? Absolutely! Have taxes become less progressive and the social welfare state diminished? You bet. Have the very rich once again become the rulers of economic life? Sure looks like it. Has upward mobility in America become the last remnant of the American Dream? The data supports that.

The question from both Ferguson and his arch rival (self-confessed Liberal) Krugman is what to do about it. Strategic tensions between the US/EU alliance and the rising Chinese power and pan-Islamic powers are on the rise. China and America are locked in a kind of deadly embrace that Ferguson calls “Chimerica”. Krugman wants a return to Keynsian remedies. Ferguson wants debt control. Until very recently, we had 3 Christian armies in Muslim lands. Now we want budget cuts at the Pentagon and increases in military spending in an almost bankrupt Europe. It seems almost as if we are reliving the 30s all over again.

Perhaps this time, the difference will be that technology and globalisation will make the transition from denial to declaration of war to despair more rapid. If the Mayans are right, it’ll all end just before Christmas. Then we can get back to reconstructing the world and everyone can benefit more broadly. Let’s then see if the 99% have what it takes to deserve the bigger piece of the pie they all say they want. What their grandparents went through to get their share was pretty tough.

Update: Income inequality is becoming very important, according to the WEF Global Risk 2014 report…

Income Inequality

Update 2: HBR has an interesting blog post entitled “We Can’t Afford to Leave Inequality to the Economists” from Justin Fox.

Update 3: A visualisation of the Global Risk Matrix for 2014

Global Risk Matrix


About Fred Pugsley

AI & Quantum guy. Foodie, skier, voracious reader.
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6 Responses to Changes in the Distribution of Income

  1. mysocialmediatoday says:

    Reblogged this on mysocialmediatoday.

  2. Fred Pugsley says:

    China has started to report its Gini numbers again, after a break of 12 years. The number for 2012 is worse than the one for the US –

  3. Pingback: Distracted by the Great Gatsby | occasional links & commentary

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