Sep

28

Another interpretation of income inequality is compensation for risk. From updated Saez data, note that top 1% does better in good times, and much worse in recessions:

                                    Real Annual Growth     Top 1% Income RAG      Bottom 99% RAG

Full period             1993-2008    1.30%                       3.94%                        0.75%

Clinton Expansion  1993-2000    4.0%                          10.3%                         2.7% 

2001 Recession     2000-2002    -6.0%                        -16.8%                       -3.3%

Bush Expansion    2002-2007     3.0%                          10.1%                         1.3%

Great Recession   2007-2008     -9.9%                       -19.7%                          -6.9%

Tyler McLellan writes:

I did some work on this a few years ago and determined that the compounding over long periods of time dominates the skew, to be clear compounding of capital and the flow of income there from in any given year.

There is also a very good intuitive reason therefore why income inequality has historically fallen only during calamity, when the actual capital stock is destroyed/seized or more commonly the connection btwn financial assets and real assets is forcefully separated.


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4 Comments so far

  1. Russell Sears on September 28, 2010 5:01 pm

    The entepeneure will tell you the reason for this is they take the risks. They accept the volatility of their earnings through the lean years, they may make nothing or loss money but in the prosperous they excell.
    Commissions, store owners, etc. take the risks and often put their capital on the line.
    Taxing, “the wealthy” is therefore taxing the risks taker, and you end up with less risk taking. If risk taking is the catalyst for growth, you end up with less growth.
    The bias in the statistics of top quartile to bottom is that it has no measure of the risks taken.

  2. Andre Wallin on September 29, 2010 12:37 am

    An email I wrote to my dad last night:

    At 10:00 am consumer confidence was released and market began to tumble with quotes on the screen not being able to keep up with supply overload, At 10:15 “permanent open market operations” announced that it purchased so and so amount of treasury securities. Market trickled higher and higher as no sizable firm was willing to bet against the federal reserve. At the end of the day what wins? The government or participants in the economy? The disconnect between the fed’s belief that it can manipulate reality and what nature allows will cause catastrophic results that I will tell my kids about. I say we move to Sweden because the violence in the streets is going to get so ridiculous that you cannot live here. China holds our debt and the northern countries hold the debt of the southern countries in Europe. I think the middle class american is less capable of handling the compromise of quality of life negotiation that is going to take place over the next xx years. I think that in the next 10 years the quality of life of the middle class chinese person will be equal to the middle class american person.

  3. Mike Hunter on September 29, 2010 6:10 am

    Even more distorted is the distribution of perceptions of wealth inequality vs its actual distribution in the population…

    see Ariely and Norton…
    http://www.people.hbs.edu/mnorton/norton%20ariely%20in%20press.pdf

    or here for a graphic display over time…

    http://www.thenation.com/image/extreme-inequality-chart

  4. kim on September 29, 2010 9:06 am

    Mike

    1. The inequality data has no predictive association with measures of standard of living (eg, real income, per capita gdp, etc), but is a good bullwhip for cowboys to herd with

    2. Why study and work harder, risk more, and strive to get ahead if others dictate the payoff is of declining value as you succeed?

    3. Do you believe those who made it to top 0.01% - taxed at 95% in 1945 and possibly again soon - have no right or insight on voluntarily deploying their wealth?

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