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Economics

WTF Inequality Chart du Jour

Today’s wtf inequality chart of the day compares the top 1% share of income in the US (absolute levels and percentage growth) to the 1% for the rest of the OECD (i.e., the “developed” world) from 1990 to 2007:

What is amazing is that not only did the US have the highest share of income going to the top 1% in 1990 (13%)…the US has the highest percentage increase (5.3 percentage points) of any of the countries included in the study as well.  If you need to know one thing about predicting the growth of just about anything, it is this:  having a larger base usually results in slower growth.  Of course though, when it comes to inequality at least, we Americans will not allow the impossible to stand in our way.

And as bad as this looks, it does get worse since…

Nor, for the United States and most of the other countries the OECD examined, do these data include income from capital gains and dividends.  If you include these income sources, the top 1 percent of U.S. income earners received 23.5 percent of the nation’s income in 2007, up 9.2 percentage points from 1990, and the top 0.1 percent received 12.3 percent, up 6.5 percentage points from 1990.

But this data is still pre-tax, so surely this situation will improve if after tax transfers are included, right?

Wrong…it gets worse again!

While after-tax transfers lead to lower inequality levels than pre-tax figures due to progressive tax systems and benefits, these taxes and benefits are higher in the rest of the OECD on average, so, while US inequality levels would decline, the actual gap between the US and other countries would likely rise.  In fact, according to Jared Bernstein, after-tax income inequality is growing faster in the US than pre-tax income.  He cites a Congressional Budget Office analysis describing:

“Between 1979 and 2007, the Gini index [a measure of income inequality] for market [pre-tax] income increased by 23 percent … and the index for income measured after transfers and federal taxes increased by 33 percent.”

But this data stops at 2007 before the financial crisis.  If we extended the analysis post 2007, it would have to show decreases in inequality since wealthier people lost more money during the crisis than poor people, right?

Wrong again…it still gets worse!

In the US, the wealth disparity actually grew post 2007 according to New York University economist, Edward Wolff.

According to his analysis, the top 1% held 34.6% of all national wealth in 2007. By Dec. 31, 2009, they held 35.6%.

Meanwhile, share of national wealth held by the bottom 90% fell to 25% from 27%

This is mainly due to the fact that unemployment is skewed towards those with lower incomes and the wealthy disproportionately benefited from rebounds in financial markets while real estate, the most common investment for the non-wealthy, has not recovered.  And lest you think this is an accident, Washington, led by the White House, Treasury and Federal Reserve, has made it a priority to prime the financial markets while allowing housing and real estate values to continue to fall.

One can argue about whether this is the correct strategy or not, but the consequence of this approach is actually to have exacerbated inequality that was already too high in the first place.

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