Changes in the Wealth and Income of Those at the Bottom Over the Past 30 Years

Alex Gourevitch has a recent post that brings up an excellent point.  So much of our conversation on changes over the past thirty years describes what is going on at the median or average value.  There’s an active debate on whether or not median incomes have stagnated and what that means.  But there’s little focus on what is going on at the bottom end of the distribution and less discussion of the wealth distribution.  Alex:

Recently, the Economic Policy Institute published “11 Telling Charts from 2011,” including the following one showing the share that different segments of the US Population took of the wealth gain from 1983-2009.

When we first looked at this chart, we started reading from the left and adding the numbers but did a double take by the time we added the Top 1%, Next 4%, Next 5%, and Next 10% – or the top 20%. Add their shares together and you get 101.7%. At first that just didn’t seem right, since our assumption was that when you add up all the shares one would get 100%. Naively, we had assumed that, while radically unequal, the gain in wealth for all quintiles would positive. A piece of folk philosophy in the United States is that the rich can gain huge gobs of money and power, so long as the poorest can also have some piece; and that those who rise do so on their own merits, but not by making the worst off even worse off. That, as it turns out, is also a premise of the most influential theory of justice in contemporary political philosophy, which states that the only permissible inequalities are those that make the worst off better off than they otherwise would be under pure equality.

The past twenty-five years have followed a different path from mainstream, common sense theories of justice. The worst have been made worse off.

It’s not even the worst off – those in the middle 40%-60% range lost wealth.  A smaller slice of pie for an American picked at random.

There’s two things to examine – income and wealth.  To add another chart, let’s look at differences in income.  Heidi Shierholz at EPI was kind enough to email me the following chart and description:

The mean income of the lowest decile is 11% below where it was in 1979, and the average income of the second decile (20th percentile to 40th) is roughly unchanged from where it was in 1979 (2% above).  The middle decile (40th-60th) is 10% above where it was in 1979, the fourth decile (60th-80th)  is 22% above, the highest decile is 45% above, and the top 5% is 64% above.

The bottom 20% has substantial losses and the 20th-40th essentially holds steady.  It’s probably safe to say that somewhere between a fourth and a third of the income distribution has seen actual declines in real terms since 1979 by the Census definition of income (pre-taxes, only includes cash transfers, no cap gains, etc).

Hence the need to critically examine pre-transfer, market-based distributions from our economy.  Also notice the strong gains in income for those at the bottom in the late 1990s – full employment really does raise all boats.

Meanwhile, what is driving the wealth difference?  Table 8 in the document used to create the first chart shows that an explosion in debt dropped out the net wealth of the bottom 40%.  There wasn’t much, if anything, gained in stocks and other forms of equity and wealth, and a lot gained in debt.

When widening inequality and declining real wages give you lemons, make lemonade.  There was a popular argument in conservative circles a few years ago that income inequality wasn’t so bad because consumption inequality hadn’t increased so much.  This was in part due to arguments that the cost of being poor was increasing less than the cost of being rich (while ignoring that most of those trends had to do with food inequality - that link will give you links for that debate).  And part of it, almost by definition, had to be the result that debt was exploding to maintain consumption.

But this is a crucial part of the debate that always gets hidden – whatever is going on for the average American, there are a huge group of Americans worse off, in absolute and relative terms, in the wages they get in the current market economy and with the wealth they’ve tried to build.

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9 Responses to Changes in the Wealth and Income of Those at the Bottom Over the Past 30 Years

  1. Liam Malloy says:

    The best evidence I’ve seen about consumption inequality comes from Aguiar and Bils and says that consumption inequality has tracked income inequality closely.

    http://www.nber.org/papers/w16807.pdf?new_window=1

    It corrects for a number of measurement issues in the data and uses two different methods which both show consumption inequality tracking income inequality closely.

  2. Milton Recht says:

    “whatever is going on for the average American, there are a huge group of Americans worse off, in absolute and relative terms, in the wages they get in the current market economy and with the wealth they’ve tried to build.”

    Your conclusion is unsupported by the charts.

    The charts shows differences in amounts held or earned by percentile groups, but it is not measuring the difference in wealth or income among the same families. The Census definition of family is related individuals living together.

    Having more young people move out of their parent’s homes, more divorces, more cohabitation for which a family measurement does not combine the partners income or wealth, more dual earning husbands and wives, and more retirees and especially more older retirees would produce much of your results. Immigration differences will also affect the inequality measurements.

    Many studies show that the top earners and wealth holders are not static over a decade or longer. There is considerable churning at the top, middle and the bottom with many moving out of their initial percentile ranking by several deciles. Longitude studies that track families, households or individuals over time show income and wealth gains as one moves from new entrant into the workforce to experienced worker to dual worker household to retiree. They also show a decline in family income as one enters retirement or divorces and a wealth loss in retirement and after divorce.

    Over long time periods, 30 years, of measured inequality and wealth changes, we have a changing amounts, and changing relative weights, of new entrants, established workers, married, divorced and retired.

    Unless one controls for normal life events, and establishes equal weight at the beginning and end of the period, then the different amounts of normal life events in the beginning and ending time periods will cause much of all the supposed inequality measurements.

    If opportunities for wealth and income gains did not exist for new workforce entrants in the US, I would expect an increase in emigration and a decrease in immigration as one sees in other countries without economic opportunities. Yet, the US has a low emigration rate and a high immigration rate.

  3. TStockmann says:

    Perish the thought that “the most influential theory of justice” has resonance only with people who already agreed its outcome. For anyone else, the citation of Rawls is an auto-discredit. It might be worth considering what “average American,” the only alternative by numbers to the concentrated power of the elite, thinks about the fairness of distribution underneath their middling position, especially in relation to their own.

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