Rising inequality

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In a couple of figures..

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New York City’s richest residents gained most in the recovery from the 2007 financial crisis, while the bottom half lost ground. The Independent Budget Office, a nonpartisan public fiscal monitor, said it examined annual samples of 770,700 personal tax returns to determine income distribution among New Yorkers from 2006 to 2014, adjusting the data for inflation. During that nine-year span, median income among the top 50 percent of New York earners remained about $65,000, while that of the bottom half dropped 13 percent to $12,360. The top 1 percent took home 41 percent of the city’s income distribution in 2014, a slight increase from 2006. Income from the bottom half totaled 5.6 percent, a decline of 1.8 percentage points.

Study Says New York City's Richest People Benefited Most From the Recovery - Bloomberg

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The economist Gabriel Zucman estimated in his 2015 book, The Hidden Wealth of Nations, that worldwide more than $7.5 trillion is squirreled away in offshore tax havens — 8 percent of the world's financial wealth. While some of it is properly declared to world governments, about 80 percent, or $6 trillion, is never taxed at all.

A top expert on tax havens explains why the Panama Papers barely scratch the surface - Vox

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From Chicago Booth

New data: Inequality runs even deeper than previously thought
HOWARD R. GOLD | MAY 23, 2017
SECTIONS ECONOMICS

Since the early 2000s, Thomas Piketty of the Paris School of Economics and Emmanuel Saez of University of California at Berkeley have published influential research on income inequality. Still, their picture of wealth and income inequality in the United States remained incomplete, mostly because of gaps in their data. Using a new data set, they find greater inequality in the US than they had previously recorded.

Prior to their latest research, Piketty and Saez had built a massive database on wealth and income distribution (wid.world) that now houses data about 34 developed and emerging economies, from Argentina to Zimbabwe, going back as far as 1800.

But much of the data focused on macroeconomic totals, while inequality studies used tax and survey data that weren’t consistent with these totals. The researchers were also unable to determine the full impact of government transfer payments and redistributions, such as social security and food stamps, on people of various income strata.

So Piketty, Saez, and Gabriel Zucman of University of California at Berkeley combined tax, survey, and national-accounts data to create distributional accounts that they say capture 100 percent of US income since 1913. The new accounts include transfer payments, employee fringe benefits, and capital income, which weren’t in previous data.

The data set reveals since 1980 a “sharp divergence in the growth experienced by the bottom 50 percent versus the rest of the economy,” the researchers write. The average pretax income of the bottom 50 percent of US adults has stagnated since 1980, while the share of income of US adults in the bottom half of the distribution collapsed from 20 percent in 1980 to 12 percent in 2014. In a mirror-image move, the top 1 percent commanded 12 percent of income in 1980 but 20 percent in 2014. The top 1 percent of US adults now earns on average 81 times more than the bottom 50 percent of adults; in 1981, they earned 27 times what the lower half earned.

   

Government transfer payments have “offset only a small fraction of the increase in pre-tax inequality,” Piketty, Saez, and Zucman conclude—and those payments fail to bridge the gap for the bottom 50 percent because they go mostly to the middle class and the elderly. Pretax income of the middle class (adults between the median and the 90th percentile) has grown 40 percent since 1980, “faster than what tax and survey data suggest, due in particular to the rise of tax-exempt fringe benefits,” the researchers write. “For the working-age population, post-tax bottom 50 percent income has hardly increased at all since 1980.”

And although the growth in income inequality from the 1970s to the 1990s was caused mostly by wage growth among top earners, that gap “has been a capital-driven phenomenon since the late 1990s,” the researchers contend, because of an income boom due to equity and bond holdings. “The working rich are either turning into or being replaced by rentiers,” they write, echoing a theme from Piketty’s 2014 bestselling book, Capital in the Twenty-First Century.

Finally, in an encouraging trend, the gender gap has narrowed and “mitigated the increase in inequality among adults since the late 1960s,” the researchers write. Men aged 20–64 earn on average 1.7 times more labor income than women today, versus 3.7 times more in the early 1960s. Nevertheless, the US “is still characterized by a spectacular glass ceiling,” they argue.

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The sharp and steady increase in US inequality in recent decades has been well documented. Less attention has been paid to a potentially even more important and alarming trend — a decline in US social mobility. After all, this is the very essence of the American Dream, that people can succeed and prosper if they just work and try hard enough. A startling decline in the ability of Americans to climb up the social ladder is documented in a new study published by the Federal Reserve Bank of Minneapolis.

The report, entitled " The Decline in Intergenerational Mobility After 1980" finds "mobility declined sharply for cohorts born between 1957 and 1964 compared to those born between 1942 and 1953." Why the distinction? "The former entered the labor market largely after the large rise in inequality that occurred around 1980 while the latter entered the labor market before this inflection point," write Jonathan Davis of the University of Chicago and Bhashkar Mazumder, a Chicago Fed economist. They find that "share of children whose income exceeds that of their parents fell by about 3 percentage points" in the period staring in 1980. Their findings echo a study from the St. Louis Fed in March that showed US social mobility is much lower than its rich-country peers'.

Social mobility is on the decline, and with it American Dream - Business Insider

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It's not just money..

Hope is an important channel driving people’s willingness to invest in the future. My early research on well-being work highlights its particular importance for people with less means, for whom making such investments requires a greater sacrifice of current consumption than it does for the rich (Graham et al. 2004). In addition to widening gaps in opportunity, the prosperity gap in the US has led to rising inequality in beliefs, hopes, and aspirations, with those who are left behind economically the least hopeful and the least likely to invest in their futures. A tale of two Americas There are, indeed, two Americas. Those at the top of the income distribution (including the top of the middle class) increasingly lead separate lives, with barriers to reaching the upper class being very real, if not explicit (Reeves 2017). Those at the top have high levels of hope for the future and make investments in themselves and in their children’s health, education, and knowledge more generally. Those at the bottom have much lower levels of hope and they tend to live day by day, consumed with daily struggles, high levels of stress, and poor health.

The high costs of being poor in a rich land | VOX, CEPR’s Policy Portal

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Yes, the winners are taking more, the ‘Our broken economy’ story shows

First, give credit to where it’s due: David Leonhart of The New York Times has produced a wonderful chart on income inequality in his article, “Our broken economy.”

Taken from data compiled by Thomas Piketty, Emmanuel Saez and Gabriel Zucman, it shows how the poor and middle class, who used to see the benefits from income growth, are now largely getting the scraps, left behind by the 1%, or really, the 0.001%.
The New York Times
What a chart!

Importantly, the chart adjusts not just for inflation but also taxes, transfers and non-cash benefits. Of course, there are limitations to focusing on income. A new study, as detailed on MarketWatch on Monday, shows that the gaps aren’t as large when consumption rather than income is used to measure economic performance.

Read: Most of what you think about inequality is wrong
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Income has its limitations — for example, not capturing the benefit from consumption funded from financial wealth or from durable goods. There’s also a big problem with income being underreported (though consumption also has measurement problems).

Even just focusing on income, one thing the chart demonstrates is the winners accruing far more of the gains. Technology has allowed firms to better identify top talents and for those talents to serve a bigger audience. This was well explained in another New York Times story, from 2010, o[url=http://www.nytimes.com/2010/12/26/business/26excerpt.html]n why superstar pay stifles everyone else.

In response, Leonhart suggests a more progressive tax code, a better functioning education system, more bargaining power for workers and less tolerance for corporate consolidation. How much any of those changes would push back against the relentless advance in technology remains to be seen.

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What a difference half a century makes. Especially if you’re not living in the U.S. Are you doing better than the previous generation? The Pew Research Center, a nonprofit think tank in Washington, D.C., asked nearly 43,000 people in 38 countries around the globe that question this past spring. Residents in 20 countries said people like them were better off than they were 50 years ago. In Vietnam, 88% felt better off, followed by India (69%), South Korea (68%), Japan (65%), Germany (65%), Turkey (65%), the Netherlands (64%), Sweden (64%), Poland (62%) and Spain (60%). Overall, 43% of people in those countries said they were better off. All told, a majority of respondents in these 20 countries said they were better off. However, the U.S. wasn’t one of them. The U.S. was among the other 18 countries in which people said they were actually worse off than half a century ago.

In the U.S., the rich appear to be leaving the middle class behind. The American middle class made up just 26% of incomes in 2014, down from 46% in 1979, adjusted for inflation, according to a separate report released last June by the Urban Institute, a nonprofit and nonpartisan policy group. The upper middle class controlled 63% of all income in 2014, up from just 30% in 1979. And it isn’t because more middle-class Americans are richer: Middle-income households make up 120.8 million of the population, almost as much as upper middle-class and lower-income Americans combined.

Americans say they are worse off today than 50 years ago - MarketWatch

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Rising inequality is hurting the economy:

What this report finds: Income inequality in the United States is suppressing growth in aggregate demand (spending by households, businesses, and governments) by shifting an ever larger share of income to rich households that save rather than spend. This rise in inequality has been overwhelmingly driven by the failure of pay for typical American workers to keep pace with economy-wide productivity growth. EPI estimates that rising inequality has slowed growth in aggregate demand by 2 to 4 percentage points of GDP annually in recent years.

Why it matters: For decades, the drag on demand growth stemming from rising inequality has been compensated for by other economic and policy developments—notably a long-running decline in interest rates. Going forward, however, these compensating mechanisms are likely to fail, which means that the inequality-induced drag on demand would translate directly into slower economic growth overall.

What we can do about it: In the near term, we need more expansionary macroeconomic policies—lower interest rates and larger budget deficits—to counter the downward pressure on demand. In the longer run, we need to stop or reverse rising inequality by enacting policies that spur faster wage growth for low- and middle-wage workers. Raising these workers’ wages would not only raise living standards for American families, it would also ensure robust economic growth.

Inequality is slowing US economic growth: Faster wage growth for low- and middle-wage workers is the solution | Economic Policy Institute

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In 1980, the U.S. and Western Europe had similar levels of inequality. And today? Not so much. While the top 1% of earners made up just 10% in both regions in 1980, it increased slightly to 12% in 2016 in Western Europe, but doubled to 20% in the U.S. “Since 1980, income inequality has increased rapidly in North America, China, India, and Russia,” it said. “The income-inequality trajectory observed in the U.S. is largely due to massive educational inequalities, combined with a tax system that grew less progressive despite a surge in top labor compensation since the 1980s,” it found.

In Europe, tax and wage inequality was moderated by educational and wage-setting policies that were more favorable to low and middle-income groups. In the U.S., out of 100 children whose parents are among the bottom 10% of income earners, only 20 to 30 of them actually go to college. However, closer to 90 out of 100 children go to college if their parents are within the top 10% earners. What’s more, research has shown that when elite colleges open their doors to students from poor backgrounds, academic performance at the institution doesn’t decline.

Inequality in America stalks CEOs, Trump and billionaires at Davos - MarketWatch